Extra Payments Pay Off

Taking a mortgage out over 25 years or more helps make the monthly payments more manageable, but by extending out the loan for so long you really increase the amount of interest you pay. 

To help reduce the total interest you pay on a mortgage (or any loan) I would encourage you to make extra payments.  If you get a tax return or a bonus, make sure at least some of it goes to repaying debt.  High interest debt, like credit cards, gets top billing as my first recommendation for extra payments, but reducing mortgages help long term as well.

For example, if you have a $10,000 credit card balance at 19%  annual interest (store cards range from 24% to 28%) and have to make the monthly interest payment and the monthly minimum principal payment of 2% (some are 3%) with a minimum payment of $20, you will pay the credit card off after 13.5 years and will have paid over $7,500 in interest.  If you can make an additional payment of $600 each year in the first 5 years you will knock off over 3 years of payments and save over $2,300 in interest.  It is well worth your time and money to try to pay off credit cards quickly, and not add to the credit card debt as you pay it off.

BoC concerned about debt

The Governor of the Bank of Canada, Marc Carney, made a few comments this week about his concern for Canadians' debt, savings levels and how rising rates will impact Canadian households.   About our debt and savings levels he said:

"Financial vulnerabilities have increased as a result. Canadians are now as indebted (relative to their income) as the Americans and the British. The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years, despite improving economic conditions and the ongoing low level of interest rates. This partly reflects the fact that the increase in aggregate household debt over the past decade has been driven by households with the highest debt levels.

There are some offsets. Debt is largely fixed rate and household net worth is at an all-time high. However, borrowers should remember that a fixed-rate mortgage will reprice a number of times over the life of the mortgage and, while asset prices can rise and fall, debt endures.

The fact that the “official” personal savings rate in Canada has remained consistently positive is of limited comfort. The personal savings rate has fallen to historically low levels, despite the fact that the baby-boom generation is entering its highest saving years. Adjusting for housing expenditures, Canadian households have now collectively run a net financial deficit for 40 consecutive quarters, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

The Story of 4 Little Pigs

Once upon a time there were four little pigs, brothers all, who decided to head out into the world and build their own homes.

The first little pig didn't want to spend much time or money on his house as there were many more enjoyable activities he could be doing.  He hastily built a frame, found some straw and hay in a nearby field, and put it all together one morning before heading out for a round of golf with his buddies and then an all-nighter playing Pinkeneye 007 on his porkstation 3.  He laughed as he walked by his brothers' yards and saw how hard they were working on their homes. 

The second little pig didn't want to spend any money on his house as he wanted to save as much he could for retirement.  He was afraid that he might have to live in a pig pen if he didn't have enough money saved for his senior years, so he never spent anything extra.  He didn't have any experience building a house, but he found some free plans at the local library, gathered the sticks from discard bins at local wood yards, and found some used twine at a local post office.  He spent several days putting the house together, an activity made more difficult because so many of the sticks were crooked and the twine often broke.  When he was done he went to Cost Club to eat the free samples as a reward for how little his house cost him.  He shook his sadly as he walked by his brothers still building their homes, knowing that they had spent more money than he had, but he felt sorry for them wasting all that money on their houses with retirement only a few decades away.

Avoiding The Debt Trap

I presented a seminar called "Avoiding the Debt Trap" at the Rocky Public Library on Thursday, Feb 3.  I have included some of the highlights and a link to the slide show that I used (500 kb).

Avoiding The Debt Trap

Debt is an obligation to pay for money/services given out, often at an additional cost of interest

When do debt problems start?

• Usually when spending more on wants than needs
• Spending more than is taken home
• Put extras on credit cards and don’t pay them off

Controlling Your Wants

• Write down what you need and their costs - Mortgage, rent, insurance, food, medicine
• Write down what you want and their costs - Cable, phone, movies, meals, vacations
• Look at take home income, figure what fits - Needs come first, wants can be postponed and may even change with time

Common Bad Debt

• Vehicle (truck or car)
• Quad & snowmobile
• RV, motor home
• Vacation
• Sports
• Entertainment (movies, bar, TV)
• All things that while enjoyable, but add no money to savings, no value. They cost money, but there are no monetary returns.

Choices - Avoiding debt or getting out of debt is about choices

• Choosing needs over wants
• Choosing long-term over short-term
• Choosing to control your lifestyle and its costs vs. your lifestyle

For full details from the presentation, please go to the slide show pdf (500 kb).  Any comments or questions, please post them and I'll get back to you as soon as I can.  Jerry

6 Tips to Controlling High Interest Debt

If utilized properly, credit can be very useful. You can obtain loans to help you purchase a new car or house, for example, since it is normally hard to find sufficient funds for either in a savings account. However, you should always bear in mind that any money borrowed must be paid back with interest.

If you do not pay close attention to your finances you can quickly run into financial difficulty, perhaps seemingly insurmountable difficulty! Some people wind up borrowing money simply to pay their debts, leading to a debt cycle that spirals out of control.

People find themselves financially strapped and consequently in debt from a number of means:
  * Unemployment, regardless of the reason
  * Unexpected bills
  * Divorce
  * Out of control spending well beyond one's budget
  * Inability to put money aside for savings
  * Inattention to mounting financial obligations
  * Any catastrophic and expensive life event (e.g. severe auto accident)

Below are 6 tips to help make sure you don't get even further into debt if you are already struggling.

Typical Wedding About $26,000

A little over a year ago I posted an article called The Cost of a Wedding.  The typical cost of a wedding in 2009 was $26,000, an amount high enough to make me look it a couple of times and shake my head in disbelief.   The Globe and Mail recently posted an article about a company that makes princess dresses for little girls at a cost of $1,600.  Anecdotally. I surveyed a few young ladies who graduated last year and the typical cost of their grad dress was about $1,000 plus another $200 for alterations.  I asked them if any of them have worn it since the grad ceremony and none of them have.

As Canadians start their Christmas shopping, I would encourage them all to think of this: is what you are buying for your friend or family going to be worth the price?  Will it last or be used more than once?

Are we teaching students enough about debt?

Students are leaving university with more debt than ever, often crossing the $40,000 mark, and then they go out into the world and accumulate even more debt buy buying rent-to-own furniture and borrowing for vehicles. 

The real scare comes from credit cards.  They are freely offered with little explanation of how to use them and how they affect your credit score.  And those habits that people form in their teens and 20's usually carry on throughout their life.

This may seem a little alarmist, and it is.  But I really want everyone to understand that excessive spending and debt accumulation can cause problems for not only you, but your whole household for decades after you bought that TV or went on that vacation.

Check out this article at Canada.com to find out more details about Canadian debt loads.

Take care of your debt.  Life will be so much easier.  Jerry

Do You Have A Plan?

No matter what stage of life you are in, a financial plan can help you direct your finances, identify where your costs are going and how to best take advantage of investing opportunities.

If you have student loans and credit card debt, a financial plan can help you figure out which loans should be paid off first, easing your cashflow problems and reducing the rates you pay. 

If you are buying a home or newer vehicle, a plan can help you know what you can realistically afford.  Too many people purchase homes or vehicles thinking of only what they want and not what they can actually afford.  A good plan will take into account bumps in rates as well, giving you some breathing room even with economic shocks.

If you are trying to figure out how and what to save for retirement, a plan can help you know what your goals should be and what you need to do to achieve them.  The longer you have to save, the more time your plan has to work to make financial security in retirement possible.

Even in retirement a financial plan can help you know what to do with your investments, how much you can withdraw every year to live on, and what you may have left of your wealth that can help your loved ones.

Every stage of life should have a financial plan.  With a plan, you know what you are building and what you need to build it.  Don't hesitate to contact a trusted Financial Planner while you are trying to build your plan for your future.  Jerry

Canadians Loving Debt?

If you have been reading any newspapers or news magazines over the past couple of months, you probably have read a few articles about how Canadians' household/personal debt is worrisome.  Since the economic troubles started 3 years ago, Americans have been working hard to both lower their personal debt and to increase their personal savings.  This is great because their personal debt had risen to around an average personal debt load of 150% of annual income and savings was around 0% for a few years leading up to 2007.  This significant economic event has shaken up the Americans and has caused consumers to change their spending and saving behaviour.

However, the economic event has not shaken up Canadians enough to change behaviour in the same way.  In fact, our reputation as savers is going out the window.  Over the past several years our savings rate dropped not only to 0%, but there were quarters where it was negative, meaning people were dipping into their savings to spend money on homes/vehicles or other items.  And our personal debt to annual income ratio has risen to just below that of the Americans with ours now at over 147%.  Much of this is because with today's low mortgage rates, people have been buying the largest house they could afford, not taking into account that rates won't always stay this low.

What does this mean for us?

• As rates increase, and they will, servicing the debt at these high levels will become very difficult for most Canadian households, which will force Canadians to change their behaviour.  Many will have missed the opportunity to pay down debt during the lowest ever rate environment and will have to concentrate on being able to make the rising payments.
• The activities that many Canadians have enjoyed over the past several years, annual trips, eating out a few times a week... will probably decrease as people try to decrease expenses.
• The rising rates will encourage more saving as current low returns make people feel like they might as well spend the money as they don't make much saving it.

Hopefully, you have enough years left before retirement to pay down debt and improve your savings/investment nest egg.

Jonathon Chevreau, Wealthy Boomer columnist for the Financial Post, recently wrote an article trying to emphasize Freedom, not Stuff.  It's worth a read and may encourage some to review their own habits and what the future may hold for them.

Debt or Investments First?

I often get asked: “Which is more important, investing or paying down debt?”  Usually my answer is "Both."

Let me qualify that, the most important priority is paying down high interest debt like credit cards.  Credit cards often have interest rates ranging from 18% to 28% which has a tremendous negative impact on where your money is going and can make it impossible to invest in yourself.

Once you have the high interest debt paid off, then you should split your disposable income between paying off debt and investing.  This balance can serve you well no matter what happens to the rates.  If the rates go up, your term deposit and savings account earnings increase.  If rates go down, you will be able to pay down debt more quickly.  Over the long term (more than 10 years) you will see the benefit of doing both activities.  Even if you are investing in mutual funds or stocks, over the long-term reinvesting dividends will help your investments grow, while your loan payments steadily pay down your debt.

The real point is that you want as much time as possible for compound interest to work on your investments while steadily paying down your debt.  Jerry

Good Financial Articles

There are a  lot of good articels to read around the internet, and this week seemed to have a lot worth reading.  The following are a few I thought were interesting and worth sharing.  I don't always agree with everything on these websites, but I think the linked articles would be of benefit for our readers.

FP Magazine Daily - Men and women see retirement differently
Globe Investor Blog - The cost of bad habits
FP Wealthy Boomer - 20% betting that CPP, lotteries or inheritance will make up for failure to save in RRSPs
Globe Investor Blog - Many couples don’t share same retirement dreams
Macleans Magazine -Awash in a sea of debt- Oblivious to the risks, Canadians are piling on record debt loads
FP Wealthy Boomer - "I need $1 million to retire " and 5 other popular retirement theories that need a rethink

Each one of these articles deals with an important area of financial education.  I hope you enjoy them, and feel free to comment on this blog about books and articles that have helped you in your progress towards your financial goals.  Jerry

New Year + New Plan = New Life!

With the holiday season over for another year, many of us likely have more debt than we’d prefer following the aftermath of utilizing credit cards, lines of credit, etc.  A great New Year’s Resolution is to not fall into this seasonal trap ever again.  Starting a budget plan now to cover yearly expenses including the ‘big hits’ (summer vacation/winter vacation and December shopping) would be a refreshing way to start off the New Year.

And why stop there?  This could be the year to create or update your financial plan.  Budgeting, protecting assets, retirement planning and life insurance – it sounds like a daunting task to sort through.  With the assistance of a financial planner and a little homework on your part, it can get done.

Decluttering and organizing the home has been a huge topic in magazine articles and home shows so why not apply this to your life as well?  Having a plan reduces stress and encourages a feeling of contentment knowing that your budget, retirement and loved ones are taken care of.
Elaine, Personal Financial Counsellor

What's your goal for 2010?

Do you have a financial goal and plan for this year? Do you have any goals for your finances in 2010?

It’s important to have a goal and a plan on how to achieve it. If you don’t have a goal, it’s like a ship not having a destination. And if you do have a goal, but no plan on how to achieve it, that is like a ship that doesn’t have a crew. Either way, you end up going wherever the current and wind take you, and you have very little control over where you end up.

Debt Support Groups

There are a lot of support groups out there; weight loss, addictions support, single parent groups…  A support group that has been gaining in popularity over the past 3 or 4 years is the Debt Support Group.

A debt support group works very similar to the others:  you need to be completely honest, willing to share your actions and thoughts with the others, and your peers hold you accountable for what your actions.  You then get support in changing and controlling your spending, opinions of people going through similar situations, valuable lessons in budgeting, and share in the successes of each other.

Finances in your 20’s – or The Age Of Debt

Your 20’s are an exciting time.  You are determining your career, possibly even changing career paths a couple of times.  You usually finish your concentrated formal education (university, college) during this time period, and most of you have gone into debt to pay for your education.  You purchase your first vehicle with a bank loan, usually around $4,000 to $5,000, and you wonder how you can make the payments.  For many, they are wondering about starting a family and if it’s time to invest in a house and avoid paying rent.


The 20’s is a time of accumulating debt.  There is nothing wrong with that.  It is normal.  However, you want to make sure that the debt makes sense and its accumulation is controlled.


Education debt – It is normal for students to leave a 4 year degree with over $30,000 in debt.  That is a lot of debt when you don’t have a career job to help pay it off.  At $30,000 over 7 to 9 years, that means you will be paying over $500/month to student debt.  If that debt is built by going through a program that will give you a good living, it may be worth it.  However, if that debt paid for ski trips or a program that only offers $20,000/year in job salaries, you will have a very heavy burden for a long time.  While education debt may be necessary, try to keep it down.  You will appreciate it when your friends are still paying it off at 34 years old and you are free and clear.

Debt Is Way Too Easy?

"Don't Pay for 14 months!!  No Money Down!"

My kids can practically quote some of the TV commercials that have pitch men shouting slogans about how cheap everything is and that you should get it now.  Especially the vehicle and furniture retailers.  Those ads are on all the time.  I have to turn down the volume just so I can think. Maybe that's a part of their advertising gimmick, making only their sales slogan stick in your head and erase all the other ads.  Who knows?  I think it might work on my kids.  To them, getting the item is far more important than thinking of how you might pay for it.  They would be quite happy to borrow money for every little thing that comes up on TV.

Debt itself is not a bad thing.  In fact it can help us purchase things that just cost too much to realistically have saved for before we buy: ie. a house, vehicle, or education.  So for those things most of us have to borrow money, and it's worth it to have a mortgage so we can have a house..  But there are things where borrowing money doesn't really make a lot of sense.

For instance, if you pay for a computer on credit card and make low monthly payments on your card, you will probably have to replace the computer before you have even paid it off.  That's probably not a good thing to borrow for and pay back over 7 years.

The smart people at Wealth Web Gurus have a very good article about "Good Debt vs. Bad Debt."  It describes how debt can help you and when it isn't good for you.

The Financial Post has an article about how easy it is to get into debt.  The author, Gary Marr, thinks it is a little too easy to get into debt.  "Debt Becomes Us."

Using debt wisely can help everyone over the course of their life.  Use it unwisely and you'll end up with a whole lot of letters and phone calls, maybe even some guy named Vinnie knocking on your door at midnight, asking for the keys to the car.  Nobody wants that.

My own advice about debt is:  If you have to borrow for it, the value of the item should last longer than the loan.
Jerry