The flawed system

Over the last couple of days, there has been increasing noise about the household debt levels. Apparently, Canadian household debt levels are at the same levels seen in the US just prior to the 2008 recession. Everyone is saying that we need to reduce debt. The Finance Minister, the Bank of Canada Governor, the C.D. Howe Institute ... the list goes on.

So why is it then that we have such liberal credit policies in place?

The interest rates are at amazingly low levels which in turn means that mortgage rates are low as well.

Banks will lend you all kinds of money ... and you don't even need to ask. You sir, are pre-approved for $$$ in Line of Credit, in addition to all the $$$ we are giving you to buy your next house.

Credit card companies are literally tripping over each other trying to get people to sign up for credit cards. And as soon you get one, you're bombarded with an endless supply of "cheques" so that you can max out that credit limit. Its ok if you can't pay off that money coz that only means that the companies will collect some hard-earned interest at 20%.

You can't go to any store today and expect to complete your purchase without being offered their store credit card. "Oh you already have a credit card?? Well ours is nicer. We give you extra $$ in bonus cash. Plus ours is made from the best plastic ever. Its so nice that you won't even know its there ... till the bill shows up."

Looking to buy a used beater car? "Why not go for this brand-new top-of-the-line luxury model that warms and caresses your butt as you juggle your coffee and cigarette and "handsfree" cell phone and eye-liner (wait! that's a separate rant:)). Can't afford it, well we've got just the deal for you. Since you can't afford the car, we'll give you money and the car."

And then the customer is to blame. If the "system" thinks that credit is too "free" ... well "unfree" it. About a decade ago, one needed atleast 5% down to buy a home and the longest amortization available was 25 years. I was shocked when I found out that you could now get one for 0 down and have amortization periods as high as 35 years. A lot of people don't have careers that long. How can anyone in their right mind expect them to pay off their mortgage?

I know there are a lot of people who will hate me for this. But this is what my common sense tells me ...

1. If you cannot show any discipline and save a measly 5 percent of the purchase price of the home you want to buy, you should not be allowed to buy a home.
- Yes some will argue that if they can pay their rent consistently, they'll be able to make their mortgage payments. While that is valid, its not fair to compare rental payments to mortgage payments. Add property taxes, condo fees, snow removal contract fees, hydro, gas and water bills, higher property insurance and a few others that I may be missing. Most people do not factor these costs when deciding between renting and buying. The 5% down is kind of a good faith payment, that shows that you are capable of some sort of savings. Even if you have a big enough income ... if you spend it all, becoming a home owner isn't going to help the situation.

2. If you do not expect to pay off the home in 25 years, you should not buy the home.
- 25 years is a long long time. At a 5% interest rate, on a $200K mortgage, if you just keep making the minimum required payments and the interest remains the same for the full 25 years, you will have paid almost $150K in interest on top of your mortgage amount. This will look even worse when you consider higher interest rates and higher amortization periods. Any appreciation in property will quite likely be wiped out by the interest costs. And then there is inflation and the other costs I mentioned above and very quickly its clear that you are not really ahead relative to if you were renting. Most people overlook the interest costs. And ofcourse the Banks don't want to talk about it ... its what they're after. If you start worrying about interest ... they wont get anything.

3. For 2nd and 3rd and 4th and subsequent properties, the down payment requirements need to be much higher ... perhaps even as high as 50%.
- These "investment" properties tend to mess with the real estate market a lot in my opinion. And if the market drops ... these are the first ones that get off loaded. A family that lives in the home that they own is less likely to walk away from it if its value drops. On the other hand, an investor will see it simply from a profit / loss perspective and would much rather "cut his losses". By making the down payment requirements higher for investment properties, the risk is shared a bit more evenly between the bank and the investor. It will allow fewer speculators in the market and thus perhaps avoid bubbles.

Will the "system" wake up and do the right thing? Time will tell ...

Can you live on $50K a year?

I was reading and article on MSNBC today talking about the fact that $50,000 is the median income in the US.

It got me thinking about whether $50K a year is sufficient income to life comfortably. I actually went back and checked my expenses this past year so see where I landed.

I also did a quick check using the tax calculator on TaxTips.ca to see what the take home income would be with a gross income of $50K. Here is what I found.

- With a single earner, 4 member family (couple + 2 kids), a $50K income would translate to a net, after-tax income of just over $40K.

- $40K net income translates to about $3300 per month.

- This should allow the family to lead a comfortable middle class lifestyle without giving considerations for RRSP, RESP, TFSA etc. Depending on the family's priorities, they may actually be able to invest in the plans to some extent.

So in my opinion $50K should be sufficient for a family.

And in case you are wondering, I did come in under the $40K threshold as well - not counting the RRSP, RESP, TFSA etc. But if $40K was all I had to work with, I am sure that I would have managed my expenses better (maybe there would not have been the 2 vacations or the 2 cars etc)

What about you? Is a $50K income sufficient for you?

Temptations all around

For someone trying to watch their spending, Christmas time is the worst time of the year. There are sales all around. All those pretty looking flyers with things that you would love to have. The temptation is just too much. So how does one survive this glut of temptation?

A few simple rules ...

1. Decide before hand how much you can afford to spend all season. And then ... most importantly ... stick to that budget. No matter what.

2. Identify the items you need. Maybe these are things for your loved ones. Or maybe they are for yourself. Either way, make a list of the things you need. And stick to needs.

3. Once you have your list identified, you need to figure out how much you will pay for each item. The total for all the items has to be within your budget identified in #1 above.

4. Now watch out for sales. If the items on your list go below you "expected" price, grab them. Most stores will price-match through till Christmas day in case the price drops further. So its a no-risk buy.

5. If the items are for yourself, consider waiting for Boxing day (and week).

6. Finally if you end up with some left-over dough after all items on your list have been accounted for ... Hold on to the rest. Its tempting to spend it all since you have been good all season. But a penny saved is 2 earned. Hang on to it for a rainy day.

Credit Cards are evil right?

The simple answer is NO!

Its not the cards that are evil. What's evil is Credit Card DEBT.

Most financial advisers and articles will tell you that if you are trying to live a financially clean life, you have to start using cash and do away with credit cards. That is true for people that are addicted to using cards to run up debt and spend beyond their means.

However for everyone else who can exercise a bit of self control or who already pays off their credit cards bills in full every month, Credit cards are quite useful.

Here is what I like about Credit Cards...

- They are so bloody convenient. I do not need to worry about carrying change. I do not need to worry if I have enough cash in my wallet if I see a great deal when I am out shopping. I do not need to worry about how to figure out how much I spend each month. Use a single card and other than stuff that you cannot use your card for ... everything is listed on you credit card statement.

- They save you money. A lot of cards offer you all kinds of perks. Rent a car and you can skip the Collision Damage Waiver fee. Buy your flight tickets on the card and you get free Travel Accident Insurance or in some cases even Free Trip cancellation / interruption insurance. Buy something on the right kind of card and you get up to an extra year of Warranty on the items. Some cards will also offer you a Loss or Damage insurance on your purchases. Others will give you Price Protection. All kinds of ways to save you money.

- They let you get something for nothing. All the cards that offer some kind of rewards allow you to get that reward (free travel, cash back, hotel stays etc) simply for buying the stuff that you would have bought anyway.

- They are safer than cash. If your cash gets stolen, you are out of luck. That money is gone and there is no getting it back. Lose your card instead and as long as you report it to the issuer in time, you lose nothing.

The key to using Credit cards is to ALWAYS ALWAYS pay off your monthly balance in full. No Exceptions. Another key is to ensure that it is a no-fee card or if there is a fee, that the reward you get is greater in value than the fee. And you should never chase after a reward by increasing your spending. The card only works if you use it to spend on stuff that you would have bought anyway. Not stuff that you are buying so that you can get a reward.

Also, always know what your balance is on the card at any given point of time. Don't wait to see your statement to figure out how much you spent last month. It'll be too late.

Be smart with your card and you will rarely trip up. Enjoy the benefits and let the companies pay for it :)

Live a life or Fix your finances

Can you fix your finances and still live your life at the same time?

I recently came across a fairly popular blog called Give Me Back My Five Bucks. There was an interesting post on there today when I dropped by. The post, titled, "Why I can't afford to start dating", provides the author's reasons on why she cannot start dating. The is currently trying to sort out her finances and kill about $20,000 in debt.

Why I understand her position and why she would feel this way, I have to disagree.

Fixing your finances or moving to the right financial path is not something that you have to do exclusively. Most importantly, you need to be able to live your life. If you cannot continue your life, the things that make life what it is, then your financial success either will feel empty or it will be very short-lived.

It is like a person who has to lose weight. You cannot simply stop eating and expect that it will work out well. You have to lose weight while still being comfortable with your modified diet and lifestyle. If you are doing this only short-term, you will eventually slip back into the same routine and go back to where you were.

Similarly, you have to be able to live your life while righting your financial ship. And by this I do not mean that you continue to spend like a lottery winner. You have to be disciplined for sure. But that simply means that you have to be realistic in your spending. It doesn't mean that you should stop dating or stop celebrating your kids' birthdays.

Yeah stop having romantic dinners in the fanciest, priciest restaurant with a $1200 bottle of vine. Stop trying to impress the other person with your money. There are a million ways to have a lovely time with someone else without nuking your budget. Take a walk down the beach or in a park. Make a couple of sandwiches and share them with your date on a park bench.

If you are trying to control your spending and fix your finances, you will have to make sacrifices. You will have to separate your wants from your needs. And you will need to prioritise. But try to be smart about it. Don't put your life on hold because money is not the end. The end is to be happy and comfortable. Money is just a small part that allows you to live your life comfortably.

If fixing you finances are preventing you from living your life - a reasonable and normal life - then you are doing something wrong and you need to course correct and get some help and advice.

The Secret

What is the secret to being financially "comfortable"?

Is it a big inheritance?

A Lottery win?

A high paying job?

Getting lucky in the stock market?

Finding a sugar daddy (or mommy)?

In my opinion, I'd pick none of the above. The real secret to comfortable finances is simple.

Spend less that you make!!!

I'll repeat it ... in case you missed that.

Spend less than you make!!!

It really is that simple. Its too bad that most people won't tell you that. They will tell you to invest your money. Buy mutual funds. Buy low. Sell High. And all those wonderful things. None of those are wrong. But the best solution is to spend less that you make. That way you will never be short of money.

Save what you don't spend. Invest that you save. Then you will have enough in retirement. Maybe even some to pass along to your children or grand-children.

Before Budgets

Budgets!

Who needs them? While most financial planners / advisors / bloggers will insist that everyone must have a budget, I prefer to take the road less travelled. It is not that I do not believe in budgets or that I do not think that they have any value. Rather, I feel that budgets aren't the very first thing one should think of when trying to think about finances.

Here's why - How many people out there, who have never thought of or cared about personal finances (or even those that have) can realistically and with some degree of accuracy estimate what they will spend in the coming months. Can you estimate what groceries will cost you each month? Or your bills? Or Gas and vehicle maintenance? Or Eating out? Or Entertainment? Or Travel?

The only people that will come anywhere close to estimating these items correctly are not the ones that have a budget. Instead they are the ones that have given some thought to tracking their spending. If you have never tracked your spending, it is highly unlikely that you will be able to create a useful and effective budget.

To see the future, you must know your past!

So if you are looking to improve your financial situation, the first step is to figure out where you have been spending your money over the past year. How do you do that? In this highly electronic world, most of us use bank accounts and credit cards. Both banks and credit card institutions are fairly generous when it comes to keeping records (and so should you - but we'll come to that a bit later). Also most income you are receiving is likely going to go into your bank account. So your first destination should be your bank account.

The "Checking" account - Check the statements you have received from your bank (or view them online) starting from a year ago. You should be able to list every single thing that took money from your account. Any bills you paid from your account including utilities and credit card bills should be on there. Any cheques you wrote should also be on there. The only thing you can't figure out would be the stuff you paid for in cash. But you can get a good guesstimate for that as well. To pay for stuff in cash, you had to have withdrawn cash from the account. So just total up the Cash withdrawals and you have that information as well. It won't be 100% accurate since you may still have some cash in your wallet (or purse) and of course there is going to be some loose change lying around the house or in your car or in some jeans pocket. But it won't be a large enough amount to mess up your activity here.

Once you have tallied your bank account debits, you should have the total amounts of money you spent each month over the past year. That is a prety good start. Most people can't even tell you how much they spent last year in total. So you're already doing better than them.

The next step would be to pay closer attention to your credit card statements.As you go through your credit card statements, classify your expenditures under a few basic categories ex Groceries, Eating out, Entertainment, Transportation, Clothing, Everything else. These categories will add on or blend in with the ones you got from your bank statements.

Here's an example of what your spreadsheet would look like



And you're done. Now you have listed all your expenses over the past year, neatly categorized and separated by the month of the expense.