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Allowance: Is it still a good idea?

August 12, 2019

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Allowance: Is it still a good idea?

August 12, 2019

Allowance: Is it still a good idea?

Perusing the search engine results for “allowance for kids” reveals something telling: The top results don’t seem to agree with each other.

Some finance articles quote experts or outspoken parents hailing an allowance, stating it teaches kids financial responsibility. Others seem to argue that simply awarding an allowance (whether in exchange for doing chores around the house or not) instills nothing in children about managing money. They say that having honest conversations about money and finances with your kids is a better solution.

The average allowance is $11 per week, which is about $570 per year.[i] That’s not too shabby! But if your child is consistently out of money by Wednesday, how do you help them learn the lesson of saving so they don’t always end up “broke” (and potentially asking you for more money at the end of the week)?

There’s an app for that.
Part of the modern challenge in teaching kids about money is that cash isn’t king anymore. Today, we use credit and debit cards for the majority of our spending – and there seems to be an ever-increasing movement toward online shopping and making payments with your phone using any of the apps that are available.

This is great for the way we live our modern, fast-paced lives, but what if technology could help us teach more complex financial concepts than a simple allowance can – concepts like how compound interest on savings works, or what interest costs for debt look like? As it happens, a new breed of personal finance apps for families promises this kind of functionality. Just look at your app store!

Money habits are formed as early as age 7.[ii] If an allowance can teach kids about saving, compound interest, loan interest, and budgeting – with a little help from technology – perhaps the future holds a digital world where the two sides of the allowance debate can finally agree. As to whether your kid’s allowance should be paid upon completion of chores or not… Well, that’s up to you and how long your Saturday to-do list is!

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[i] https://www.cbc.ca/news/canada/allowance-apps-are-the-modern-piggy-banks-and-they-could-really-help-your-kids-1.4926286
[ii] https://to.pbs.org/2GBrjuI

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The effects of closing a credit card

August 5, 2019

The effects of closing a credit card

Canadians owe over $599 billion in credit card debt[i], and credit card interest rates are on the rise – now over 19 percent.[ii]

So if you’re on a mission to reduce or eliminate your credit card debt (go you!), you may be thinking you should close out your credit cards. However, you need to know that doing that may have several effects, some of which may not be what you’d expect.

There are times when canceling a card may be the best answer:

  1. A card charges an annual fee
    If you’re being charged an annual fee for the privilege of having a certain credit card, it may be better to cancel the card, particularly if you don’t use it often or have other options available.

  2. You can’t control your spending
    If “retail therapy” is impacting your financial future by creating an ever-growing mountain of debt, it may be best to eliminate the temptation of buying on credit.

Then there are times when closing a credit card may not make much difference, or could even hurt your score:

  1. Lingering effects: The good and the bad
    Many of us have heard that credit card information stays on your report for 7 years. That’s true for negative information, including events as large as a foreclosure. Positive events, however, stay on your report for 10 years. In either case, canceling your credit card now will reduce the credit you have available, but the history – good or bad – will remain on your credit report for up to a decade.

  2. The benefits of old credit
    Did you know that one aspect factored in to your credit score is the age of your accounts? Canceling a much older account in favor of a newer account can actually leave a dent in your score, and we know that canceling the card won’t erase any negative history less than 7 years old. So it may be best to keep the older credit account open as long as there are no costs to the card. Another point to consider is that the effects of canceling an older account may be magnified when you’re younger and haven’t yet established a long enough credit history.

Credit utilization affects your credit score
Lenders and credit bureaus not only look at your repayment history, they also look at your credit utilization, which refers to how much of your available credit you’re using. Lower usage can help your credit score while high utilization can work against you.

For example, if you have $20,000 in credit available and $10,000 in credit card balances, your credit utilization is 50 percent. If you close a credit card that has a credit limit of $5,000, your available credit drops to $15,000 but your credit utilization jumps to 67 percent if the credit card balances remain unchanged. Going on a credit card canceling rampage may actually have negative effects because your credit utilization can skyrocket.

If unnecessary spending is out of control or if there is a cost to having a particular credit card, it may be best to cancel the card. In other cases, however, it’s often better to use credit cards occasionally, and make sure to pay them off as quickly as possible.

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[i] https://business.financialpost.com/personal-finance/debt/equifax-says-canadian-delinquencies-will-probably-rise-this-year
[ii] https://www.creditcardscanada.ca/education-centre/credit-card-basics/credit-card-interest-rates-high/

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Opportunity cost and your career

July 31, 2019

Opportunity cost and your career

“Opportunity cost” refers to what you can potentially lose by choosing one option over another – even when you aren’t thinking about it.

Nearly every choice you make precludes something else that might have been.

Opportunity cost exists in everything from relationships to finances to career choices, but here we’ll focus on that last one. Over a lifetime, the cost of career decisions can be massive.

The math
For opportunity costs that can be measured, usually in dollars, there’s even a math equation. What I sacrifice / What I gain = Opportunity cost[i]

Let’s say you have two career choices. One is to work as a mechanic at $50 per hour and the other is to work as a karate instructor at $20 per hour.

Opportunity A / Opportunity B = Opportunity cost

Here it is with numbers: $50 / $20 = $2.50

To translate that, for every $1 you earn as a karate instructor, you could have earned $2.50 as a mechanic. The ratio remains the same whether it’s for one hour worked or 1,000 hours worked because it’s based on earnings per hour.

Adding a time element
We can only work a certain number of hours in a week and we can only work for a certain number of years in a lifetime. Adding time into the discussion doesn’t change the math relationship between the opportunities but it does recognize real-world constraints. Sometimes these limits are by choice. You could be both a full-time mechanic and a full-time karate instructor, but most people don’t want to work 80 hours per week. Something has to give, and that’s where considering opportunity cost comes in.

If you only want to work 40 hours in a week, you’ll have to choose one career over the other or split your time between the two. But even in splitting your time, there is an opportunity cost. Think about it like this: Every hour spent in a lower paying job costs money if you had an opportunity to earn more doing something else.

The bigger picture
In our example using the mechanic vs. the karate instructor, the difference in annual income is over $60,000 per year ($104,000 minus $41,600). Over a 40-year working career, the difference in earnings is nearly $2.5 million, and it all happened one hour at a time.

Life balance
Your career choice shouldn’t just be about money – you should do something you enjoy and that gives you satisfaction. There may be several other considerations as well – like opportunity to travel, the kind of people you work with, and the greater contribution you can make to the world. However, if there are two choices that meet all your criteria but one pays a bit more, just do the math!

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[i] https://blog.udemy.com/opportunity-cost-formula/

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Top 10 ways to save more this year

July 24, 2019

Top 10 ways to save more this year

If you’re still writing “2018” on your checks, then it’s not too late to commit to a few New Year’s resolutions for 2019!

Here are some ideas for financial changes you can put in place today that can help get you closer to your saving and retirement goals.

1) Start a budget
There are few things that can paint your future financial picture as clearly as starting a household budget. In the process, you’ll track your spending – both in the past and in the future – and you’ll identify wasteful expenses as well as establish your priorities.

2) Start couponing
Once upon a time, clipping coupons could be quite a chore. Now, mobile apps make finding coupons for popular stores effortless, and there are online websites that provide promotional codes for all sorts of brands. If someone gave you money for buying something you were going to buy anyway, you’d take it, right?

3) Target home energy costs
Is your thermostat programmable? You can adjust your home temperature while you’re at work. Do you need to fix the insulation in the attic or that gap under the front door? Get to it as soon as you can! The longer you let those things go equates to money you might be saving on your energy costs.

4) Buy “pre-owned” items
When we think “pre-owned” we tend to think of cars. But the truth is that almost all consumer items depreciate. How much might you save by buying a refurbished phone instead of a new phone? Used laptops may cost a fraction of what you’d pay for a brand new computer. When it’s time to replace household items, consider buying used.

5) Use the 30 Day Rule to keep impulse spending in check
If you’ve got money burning a hole in your pocket, just wait. It won’t really burn you. By waiting 30 days before making a purchase, you’ll have time to decide if you really need the item or if it was just an impulse buy.

6) Use a shopping list
Want a way to stay focused when shopping and avoid wasteful spending? It might seem obvious, but get in the habit of using a shopping list. Before you head to the store, take a few minutes and write out a list (on paper or your phone), and include only the items you need. Stick to the list!

7) Quit smoking
Smoking seems to be less common these days, but for many households it’s still a costly expense that literally goes up in smoke. Think about how much you could put towards your retirement instead if you kicked the habit. (As a bonus, your health will probably improve.)

8) Stop using credit cards
Credit cards are the most expensive type of debt in many households. If you make a plan to pay off credit card debt and to save credit for (real) emergencies, you’ll probably wish you had given up your credit card habit sooner.

9) Cancel unused memberships and subscriptions
Memberships and subscriptions have a way of becoming forgotten – that is, until they automatically renew. Ouch. Keep the ones you want or need, cancel the others.

10) Cut the cord
Cable TV has become a norm but is your family really using it? Try to find less expensive ways to watch shows or movies online. Major broadcast networks can be picked up for free with an HD antenna.

Bonus ideas: Get a strategy in place to start building an emergency fund. Check your insurance policies to make sure you have the coverage you need. Research some ways in your community to have free (or nearly free) fun with your family.

It might take a little extra effort, but putting any of these ideas in place this year will help you and your family save more of your hard earned money and help get you closer to your retirement goals.

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Does your budget have more holes than Swiss cheese?

July 22, 2019

Does your budget have more holes than Swiss cheese?

Given enough time, even the best planned budgets can start to feel like they’ve sprung a leak somewhere.

Sometimes you’ll notice right away (getting halfway through the month and realizing it’s going to be peanut butter sandwiches for lunch every day). Other times it can take a while for imperfections to show (you thought you were going to have more in the vacation fund by now).

When you first start building your budget, a good place to begin is to list all the big expenses – the ones that are impossible to miss. Then it’s time to turn to the little ones that can escape notice – these are the ones that might keep your budget math from working out the way you planned.

Dig out your bank statements. Try to go back at least 6 months, if not a year. Some regular expenses may not occur monthly and can be a surprise if you only used a month or two of bank statements to track spending and build your initial budget. Many times, automatic payments or fees may be charged quarterly or even annually.

Read on for some common expenses that might sneak up on you:

Subscriptions and online services – Many of us have subscriptions for software packages or online services. Remember that deal they offered if you paid for a whole year at once? At renewal time, they may charge you for another year unless you cancel.

Memberships – Gym memberships or dues for clubs may be quarterly or annual charges as well, so they might be missed when building your budget.

Protection plans – From credit monitoring to termite protection plans, there are lots of chances to miss an annual or quarterly expense in this category.

Automatic contributions – Many charities now offer automatic contributions. These can be easy to miss when budgeting.

Things you forgot to cancel – Free trials (that require your payment info) won’t be free forever. It’s easy to miss these as well.

Bank fees – Budgeting mishaps can lead to bank fees if your balance dips. Yet another potential surprise.

Automatic deposits – Saving for your future is a great move. Just be sure to know how much is going to be withdrawn and when, so your budget doesn’t feel the pinch.

Oftentimes, when people first make the commitment to create a budget and stick to it, it can be discouraging if it doesn’t seem to be working as expected right away. Try to keep in mind that your budget is a work in progress that will evolve over time. It probably won’t be perfect from the get-go.

If you hit a speedbump, take a little time to evaluate where the numbers aren’t quite adding up, and then make adjustments as necessary. You can do this!

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Why It's a Good Idea to Track Your Budget

July 15, 2019

Why It's a Good Idea to Track Your Budget

So you’re finally on board with this whole budget thing.

You’ve set up your plan. Now you’ve got a budget complete with average historical spending by category. You’ve discussed it with family members, roommates, and anyone else to whom the budget applies. You’ve checked off all the boxes. Yet somehow – at the end of the month, the math isn’t working out. The budget is busted.

What went wrong? Life is full of mysteries, like who left the empty box of cereal in the cupboard? Where are my glasses? Why won’t the baby just go to sleep? And, where did all my money disappear to?

For a budget to work well, you’ll need to track it regularly and often. Many times, the reason you made a budget in the first place is that there’s very little room for error with saving and spending your money. A budget’s got to be loved and nurtured, kind of like a garden. Sometimes you have to get out there and pull some weeds or dig up a few rocks to keep it thriving.

Making Your Budget
To make your budget (if you haven’t already), there are several methods you can use. Good old pencil and paper never goes out of style. And it might help you see where you stand a little faster than potentially losing your initial momentum by learning a new “app”. Specialized software or online budgeting tools can be great – but they can also be fiddly if you’re not used to them. Rather than trying to figure out complicated menus and search for hidden buttons from the get-go, you might want to try it on paper first to work through your budget and establish a limit for each category of spending. Writing out your expenditures by hand has the added benefit of helping you face reality. It hurts a little more than automated solutions if you have to write the numbers down in black and white. If you’re good with spreadsheets, Microsoft Excel or Google Sheets can also be used to quickly build a budget without a frustrating learning curve.

Tracking Your Budget
Technology can be friend or foe in the home budget process. Even though you may have started out on paper, when it comes to tracking your spending for the long haul and in real time, technology is definitely a friend.

Mobile apps come in two forms: free and not free. We’ll focus on a free app for now because it’s consistent with the goal of keeping your spending under control.

Available on both iOS and Android, Mint.com is a popular choice owned by Intuit, famous for Quicken and Quickbooks software, and makes budget tracking very simple. Mint links to your bank account and other accounts you’d like to track, so you can see a complete view of your finances at a glance either on your mobile device or on your computer. Budgets are set automatically for each category but can be changed easily. Spending and income are also automatically tracked and categorized so you can view your progress – including budget amounts remaining for the month. Cash purchases can be added from the home screen.

Paper or spreadsheet methods help to make the budgeting process more tangible. Automated tracking makes it easy to monitor your progress against your budget – and to maybe think twice about spending on impulse.

The important thing is to think of your budget like a garden – once you have it planned and laid out, it’s going to take regular maintenance to ensure it stays beautiful.

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Got debt? Throw a snowball at it!

July 10, 2019

Got debt? Throw a snowball at it!

Most of us wish we could be debt free, but it seems like a dream reserved for a few financial wizards.

After all, it’s hard to find a family that doesn’t have debt hanging over them. In this day of easy credit and deferred interest, it’s not hard to accumulate sizable financial obligations.

It is possible, however, to become debt free. One method, the so-called “snowball” method, can be an effective way to get on top of those seemingly never-ending payments.

When you think about tackling your debt, it might make sense to pay off the obligation you have at the highest interest rate first, when you look at it mathematically. But sometimes the highest interest rate debt may also be the largest amount you have to deal with, which might create frustration if the balance is going down too slowly. The debt snowball method can seem counterintuitive because it doesn’t always follow the math, since in most cases, the math favors paying down the debt with the highest interest rate first. The snowball method instead focuses on building momentum – the idea that small successes can lead to larger successes. Paying off the smallest balance first can build momentum to plow through the next largest balance, then the next one and so forth – like a snowball gaining size and speed as it rolls down a hill.

To restate, once you’ve paid off the smallest balance, more cash is available to put toward the next smallest amount. After the second smallest amount is paid off, the cash you freed up by paying off the first two debts can now be applied to the third largest balance.

The snowball method of debt repayment is intended to help simplify the process of becoming debt free. Because you’re starting with smaller balances and working your way up, your mortgage (if you have one) would be one of the last balances to tackle. Some financial experts might recommend leaving the mortgage out of your snowball payments altogether, but that’s up to you and how ambitious you are!

Ready to start?
First, remind yourself it may take some time to get your debt to zero, but hang in there. If you stick to your strategy, you can make great strides toward financial freedom!

Second, make a list of your debts and sort them by size from lowest to highest.

Then, pay the minimum on all the balances except the smallest one, and put as much as you can towards that one. Let’s say the payment you’re making on the smallest balance is $20. Once that balance is paid off, add that $20 to whatever you were paying toward the next smallest balance. Let’s say that balance has a minimum payment of $30. That means you can now put $50 a month toward it to knock it out faster. When the second balance is paid off, you’ll have an extra $50 a month you can put towards the third highest balance.

See the snowball? Keep going! Over time, you should have enough momentum and freed up cash available to really make a dent in your debt.

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Should you buy or lease your next vehicle?

July 8, 2019

Should you buy or lease your next vehicle?

Behind housing costs, transportation costs are often one of the top expenses in most households.

Auto leasing has been popular for several decades, but many people still aren’t sure about the sensibility of leasing vs. buying a car, how the math works, and which is really the better value.

Should you lease a car?
In many cases, you can lease a car for less than the monthly payment for financing the exact same car. This is because with leasing, you never build any equity in the vehicle. Essentially, you are renting the vehicle for a predetermined number of miles per year with a promise that you’ll take good care of it and won’t let your kids spill ice cream on the seats. (After all, it’s not really your car.)

At the end of the lease – most often 2 or 3 years – you’ll have the option to buy the car. At this point, in many cases you would be able to find a comparable car for a few thousand less than the residual value on the car you leased. After the lease has expired, most people choose to lease another newer car, rather than buy the car they leased.

If you don’t drive many miles, there may be some advantages to leasing over buying, particularly if you prefer to drive something newer or if you need a late-model car for business reasons. As a bonus, for short-term or standard leases, the car is usually under warranty for the duration of the lease and maintenance costs are typically only for minor service items.

Should you buy a car?
If you’re like most people, when you buy a car, you’ll probably need to finance it rather than plunk down a lump sum in cash. Rates are relatively low, but you can still expect to pay a few thousand dollars in interest costs over the course of the loan. Longer loans have higher rates and more expensive vehicles can make the interest costs add up quickly. Still, at the end of the loan, you own the car.

Older cars usually have higher maintenance costs, but it may be less expensive to keep a car with under 150,000 miles and pay for any repairs, rather than make payments on a new car. Cars are also running reliably much longer now. The average age of cars and light trucks on the roads currently is up to 12 years, which means if you had a 5-year loan, you could be driving for 7 years (or more) without having to make a car payment.[i]

So a big part of the savings in buying a car vs. leasing can occur if you keep the car for several years after it’s paid off. Cars depreciate most rapidly during the first 5 years of ownership, meaning you could take a big hit on the trade-in value during that time. Keeping the car for a bit longer puts you into a period where the car is depreciating less rapidly and you can benefit financially from not having a car payment. But if you think you might be tempted to trade the car in after 5 years (and you typically drive under 15,000 miles per year), you may want to take a closer look at leasing.

Keeping your car for 10 years
How would you like to “make” an extra $28,000 over the next 10 years? That’s enough to buy another car! All things being equal (you make the same modest down payment on a leased car as a financed car), and assuming an average auto loan rate for a $30,000 vehicle, you can save nearly $28,000 in a decade by buying and keeping your car for 10 years instead of leasing a car every 3 years. And that savings applies to each car you own.[ii] (This calculation also assumes maintenance costs.)

Your savings will vary based on the type of car and its price of course, but buying a car and keeping it for a while after it’s paid off can “yield” handsome dividends.

Getting behind the wheel
It’s really up to your personal preference whether you buy or lease. If you like to rotate your vehicles so you can enjoy a new car every few years and not have to worry so much about maintenance, then leasing may be a better option. However, if you like the idea of not having to make a car payment for a good portion of the life of your car, then buying may be the right choice.

Either way, before you take the keys and drive off the lot, make sure to ask your dealer any questions you have, so you can fully understand all the terms and any underlying costs for your situation.

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[i] https://www.energy.gov/eere/vehicles/articles/fact-997-october-2-2017-average-age-cars-and-light-trucks-was-almost-12-years
[ii] https://www.moneyunder30.com/buy-vs-lease-calculator

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Why You Should Pay Off High-Interest Debt First

Why You Should Pay Off High-Interest Debt First

The average Canadian household owes over $8,500 in consumer debt.¹

Often, we may not even realize how much that borrowed money is costing us. High interest debt (like credit cards) can slowly suck the life out of your budget.

The average APR for credit cards is around 19% in Canada.⁴ Think about that for a second. If someone offered you a guaranteed investment that paid 16-19%, you’d probably walk over hot coals to sign the paperwork.

So here’s a mind-bender: Paying down that high interest debt isn’t the same as making a 16-19% return on an investment – it’s better.

Here’s why: A return on a standard investment is taxable, trimming as much as a third so the government can do whatever it is that governments do with the money. Paying down debt that has a 16% interest rate is like making a 20% return – or even higher – because the interest saved is after-tax money.

Like any investment, paying off high interest debt will take time to produce a meaningful return. Your “earnings” will seem low at first. They’ll seem low because they are low. Hang in there. Over time, as the balances go down and more cash is available every month, the benefit will become more apparent.

High Interest vs. Low Balance
We all want to pay off debt, even if we aren’t always vigilant about it. Debt irks us. We know someone is in our pockets. It’s tempting to pay off the small balances first because it’ll be faster to knock them out.

Granted, paying off small balances feels good – especially when it comes to making the last payment. However, the math favors going after the big fish first, the hungry plastic shark that is eating through your wallet, bank account, retirement savings, vacation plans, and everything else.⁵ In time, paying off high interest debt first will free up the money to pay off the small balances, too.

Summing It Up
High interest debt, usually credit cards, can cost you hundreds of dollars per year in interest – and that’s assuming you don’t buy anything else while you pay it off. Paying off your high interest debt first has the potential to save all of that money you’d end up paying in interest. And imagine how much better it might feel to pay off other debts or bolster your financial strategy with the money you save!

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¹ Kalvapalle, Rahul. “The average Canadian owes $8,500 in consumer debt, excluding their mortgage: Ipsos poll.” Global News, 12.27.2017, https://bit.ly/2CfckW0. ² Murphy, Paul. “How Does Credit Card Interest Work in Canada?” 4 Pillars, https://bit.ly/2fL2y13. ³ Berger, Bob. “Debt Snowball Versus Debt Avalanche: What The Academic Research Shows.” Forbes, 7.20.2017, https://bit.ly/2x9Q1lN.

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To close it or not to close it? That is the question.

June 26, 2019

To close it or not to close it? That is the question.

Your credit score helps determine the interest rate you’ll pay for loans, how much credit you’re eligible to receive, and it can even affect other monthly expenses, such as auto or homeowners insurance.

Keeping your credit in tip top shape may actually help save you money in some cases. With that in mind, how do you know if it’s a good idea to open a new credit card or to close some credit card accounts? Let’s find out!

Opening credit card accounts
Opening a new credit card isn’t necessarily detrimental to your credit score in the long term, although there may be some potential negatives in the short term. As you might expect, opening a new credit card account will place a new inquiry on your credit report, which could cause a drop in your credit score. Any negative effect due to the inquiry is often temporary, but the long-term effect depends on how you use the account after that (not making minimum payments, carrying a high balance, etc.).

Opening a new credit card account can affect your credit rating in two other ways. The average age of your credit accounts can be lowered since you’ve added a credit account that’s brand new (i.e., the older the account, the better it is for your score). On the plus side, opening a new credit card account can reduce your credit utilization. For example, if you had $5,000 in available credit with $2,500 in credit card balances, your credit utilization is 50%. Adding another card with $2,500 in available credit with the same balance total of $2,500 drops your credit utilization to 33%. A lower credit utilization can help your score.

Closing credit card accounts
Closing a credit card account can also affect your credit score, largely due to some of the same considerations for opening new credit card accounts. Generally speaking, closing a credit card account likely won’t help boost your credit score, and doing so could possibly lower your credit score for the same reasons above (lowering the average age of your accounts, increasing your credit utilization, etc.).

First, the positive reasons to close the account: This might be obvious, but closing a credit card account will prevent you from using it. If discipline has been a challenge, instead of closing the account, you might consider simply cutting up the card or placing it in a lockbox.

Second, the negative reasons to close the account: Closing a credit card account when you have outstanding balances on other credit card accounts will raise your credit utilization. A higher credit utilization can cause your credit rating to fall. You’ll also want to consider the average age of all of your accounts, which can play a big role in your credit score. A longer history is better. Closing a credit account that was established long ago can impact your credit score negatively by lowering your average account age.

Fair Isaac, the company responsible for assigning FICO scores, recommends not closing credit card accounts if your goal is to raise or preserve your credit score.[i]

Would opening or closing a bank account have any effect on my score?
Closing a bank account has no effect on your credit rating and normally doesn’t appear on your credit report at all. When you open a bank account, however, your bank may perform a credit inquiry, particularly if you apply for overdraft protection. A hard inquiry (such as an overdraft protection application) can cause a temporary drop in your credit score. Soft inquiries – which are also common for banks – will appear on your credit report but do not affect your credit rating. Banks may also check your report from ChexSystems[ii], a company that reports on consumer bank accounts, including overdraft history and any unresolved balances on closed accounts.[iii]

Just like a garden, the accounts affecting your credit score need to be nurtured – and sometimes pruned a bit. Checking in on your credit report every now and then may help you keep your score as robust and thriving as it can be!

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[i] https://www.myfico.com/credit-education/faq/cards/impact-of-closing-credit-card-account
[ii] https://www.chexsystems.com/web/chexsystems/consumerdebit/page/home/
[iii] https://www.mybanktracker.com/news/account-denied-chexsystems-report

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Which Debt Should You Pay Off First?

June 24, 2019

Which Debt Should You Pay Off First?

Nearly every type of debt can interfere with your financial goals, making you feel like a hamster on a wheel – constantly running but never actually getting anywhere.

If you’ve been trying to dig yourself out of a debt hole, it’s time to take a break and look at the bigger picture.

Did you know there are often advantages to paying off certain types of debt before other types? What the simple list above doesn’t include is the average interest rates or any tax benefits to a given type of debt, which can change your priorities. Let’s check them out!

Credit Cards
Credit card interest rates now average nearly 17% in the US¹ and around 19% in Canada.² For most households, credit card debt is the place to start – stop spending on credit and start making extra payments whenever possible. Think of it as an investment in your future!

Auto Loans
Interest rates for auto loans are usually much lower than credit card debt, often under 5% on newer loans. Interest rates aren’t the only consideration for auto loans though. New cars depreciate nearly 20% in the first year. In years 2 and 3, you can expect the value to drop another 15% each year. The moral of the story is that cars are a terrible investment but offer great utility. There’s also no tax benefit for auto loan interest. Eliminating debt as fast as possible on a rapidly depreciating asset is a sound decision.

Student Loans
Like auto loans, student loans are usually in the range of 5% to 10% interest. While interest rates are similar to car loans, student loan interest is often tax deductible, which can lower your effective rate. Auto loans can usually be paid off faster than student loan debt, allowing more cash flow to apply to student debt, investment accounts, or other needs.

Mortgage Debt
In most cases, mortgage debt is the last type of debt to pay down. Mortgage rates are usually lower than the interest rates for credit card debt, auto loans, or student loans, and mortgage interest may be tax deductible if structured properly. If mortgage debt keeps you awake at night, paying off other types of debt first will give you greater cash flow each month so you can begin paying down your mortgage.

When you’ve paid off your other debt and are ready to start tackling your mortgage, try paying bi-monthly (every two weeks). This simple strategy has the effect of adding one extra mortgage payment each year, reducing a 30-year loan term by several years. Because the payments are spread out instead of making one (large) 13th payment, it’s likely you won’t even notice the extra expense.

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Source: ¹ Dilworth, Kelly. “Rate survey: Average card rate climbs to all-time high of 16.92 percent.” creditcards.com, 7.5.2018, https://bit.ly/2Hpxf9T. ² Murphy, Paul. “How Does Credit Card Interest Work in Canada?” 4 Pillars, https://bit.ly/2fL2y13.

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Matters of Age

June 19, 2019

Matters of Age

The younger you are, the less expensive your life insurance may be.

Life insurance companies are more willing to offer lower premium life insurance policies to young, healthy people who will likely not need the death benefit payout of their policy for a while. (Keep in mind that exceptions for pre-existing medical conditions or certain careers exist – think “skydiving instructor”. But in many cases, the odds are more in your favor for lower premiums than you might guess.)

At this point you might be thinking, “Well, I am young and healthy, so why do I need to add another expense into my budget for something I might not need for a long time?”

Unlike a financial goal of saving up for a downpayment on your first house, waiting for “the right moment” to get life insurance – perhaps when you feel like you’re prepared enough – is less beneficial. A huge part of that is due to getting older. As your body ages, things can start to go wrong – unexpectedly and occasionally chronically. Ask any 35-year-old who just threw out their back for the first time and is now Googling every posture-perfecting stretch and cushy mattress to prevent it from happening again.

With age-related health issues in mind, remember that the premium you pay at 22 may be very different than the premium you’ll pay at 32. Most people hit several physical peaks in that 10 year window:¹

  • 25 – Peak muscle strength
  • 28 – Peak ability to run a marathon
  • 30 – Peak bone mass production

If you’re feeling your mortality after reading those numbers, don’t worry! You’re probably not going to go to pieces like fine china hitting a cement floor on your 30th birthday. But there is one certainty as you age: your premium will rise an average of 8-10% on each birthday.² Combine that with an issue like the sudden chronic back problems from throwing your back out that one time (one time!), and your premium will likely reflect both the age increase and a pre-existing condition.

If you experience certain types of illness or injury prior to getting life insurance, it often goes in the books as a pre-existing condition, which will cause a premium to go up. Remember: the less likely a person is going to need their life insurance payout, the lower the premium will likely be. Possible scenarios like the recurrence of cancer or a sudden inability to work due to re-injury are red flags for insurance companies because it increases the likelihood that a policyholder will need their policy’s payout.

A person’s age, unique medical history, and financial goals will all factor into the process of finding the right coverage and determining the rate. So taking advantage of your youth and good health now without bringing an age-borne illness or injury to the table could be beneficial for your journey to financial independence.

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Sources: ¹ Weller, Chris, and Skye Gould. “Here are the ages you peak at everything throughout life.” Business Insider, https://read.bi/2uloTeP. ² Roberts-Grey, Gina. “How Age Affects Life Insurance Rates.” Investopedia, https://bit.ly/2L7P0x6.

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Common Financial Potholes

June 17, 2019

Common Financial Potholes

A medical emergency. Your refrigerator giving out. Car trouble.

These scenarios are some common potholes on the road to financial independence. When you’re driving along and see a particularly nasty pothole through your windshield, it just makes sense to avoid it.

Here are some common potholes to avoid on your financial journey.

Excessive or Frivolous Spending
A job loss or a sudden, large expense can change your cash flow quickly, making you wish you still had some of the money you spent on… well, what did you spend it on, anyway? That’s exactly the trouble. We often spend on small indulgences without calculating how much those indulgences cost when they’re added up. Unless it’s an emergency, big expenses can be easier to control. It’s the small expenses that can cost the most.

Recurring Payments
Somewhere along the line, businesses started charging monthly subscriptions or membership fees for their products or service. These can be useful. You might not want to shell out $2,000 all at once for home gym equipment, but spending $40/month at your local gym fits in your budget. However, unused subscriptions and memberships create their own credit potholes. If money is tight or you’re prioritizing your spending, take a look at your subscriptions and memberships. Cancel the ones that you’re not using or enjoying.

New Cars
Most people love the smell of a new car, particularly if it’s a car they own. Ownership is strange in regard to cars, however. In most cases, the bank holds the title until the car is paid off. In the interim, the car has depreciated by 25% in the first year and by nearly 50% after 3 years.*

What often happens is that we trade the car after a few years in exchange for something that has that new car smell – and we’ve never seen the title for the first car. We never owned it outright. In this chain of transactions, each car has taxes and registration fees, interest is paid on a depreciating asset, and car dealers are making money on both sides of the trade when we bring in our old car to exchange for a new one.

Unless you have a business reason to have the latest model, it’s less expensive to stop trading cars. Think of your no-longer-new car as a great deal on a used car – and once it’s paid off, there’s more money to put each month towards your retirement.

To sum up, you may already have the best shocks on your financial vehicle (i.e., a well-tailored financial strategy), but slamming into unnecessary potholes could damage what you’ve already built. Don’t damage your potential to go further for longer – avoid those common financial potholes.

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Source: Lewerer, Greg. “Car Depreciation: How Much Have You Lost?” Trusted Choice*, https://bit.ly/1LtV7aP.

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You Can’t Take It With You

June 12, 2019

You Can’t Take It With You

Sixty-four percent of surveyed professionals are in favor of job-hopping.* That’s up a whopping 22% from 4 years ago!

So if you’re feeling the itch to leave your current job and head out for a new adventure in the workforce, the experience you’ve gained along the way will absolutely go with you. You may have made some great business connections, too, and gotten some fabulous on-the-job-training. All of these things will “travel well” to a new job.

But there’s one thing you can’t take with you: An employer-supplied life insurance policy. While the price is right at “free” for many of these policies, there are several drawbacks that may deter you from relying on them solely for coverage.

1. An employer-provided policy turns in its two weeks notice when you do. Since your employer owns the policy – not you – your coverage will end when you leave that job. And unless you’re walking right into another employment opportunity where you’re offered the same type and amount of coverage, you might experience gaps or a total loss of coverage in an area where you had it before. When you’re not depending on an employer to provide your only life insurance coverage, you can change jobs as often as you please without the worry of the rug being pulled out from under you.

2. The employer policy is touted as ‘one size fits most.’ But it’s not likely that a group policy offered through an employer will be tailored to you and your unique needs. There may be no room for you to chime in and request certain features or a rider you’re interested in. However, when you build your own policy around your individual needs, you can get the right coverage that suits who you are and where you’d like to go on your financial journey.

3. An employer policy may not offer enough to cover your family. What amount of coverage is your employer offering? When you’re first starting out in your career, a $50,000 or even a $25,000 employer-provided policy might sound like a lot. But how far would that benefit really go to protect your family, cover funeral costs, or help with daily expenses if something were to happen to you?

Whether or not your 5-year plan includes 5 different jobs (or 5 entirely unrelated career paths), with a well-tailored policy that you own independent of your employment situation – you have the potential for a little more freedom and security in your financial strategy. And you won’t be starting from square one just because you’re starting a new opportunity.

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“Does Job Hopping Help Or Hurt Your Career?” Robert Half*, https://bit.ly/2zThWYo.

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How to Build Credit When You’re Young

June 10, 2019

How to Build Credit When You’re Young

Your credit score can affect a lot more than just your interest rates or credit limits.

Your credit history can have an impact on your eligibility for rental leases, raise (or lower) your auto insurance rates, or even affect your eligibility for certain jobs (although in many cases the authorized credit reports available to third parties don’t contain your credit score if you aren’t requesting credit). Because credit history affects so many aspects of financial life, it’s important to begin building a solid credit history as early as possible.

So, where do you start?

  1. Apply for a store credit card.
    Store credit cards are a common starting point for teens and young adults, as it often can be easier to get approved for a store card than for a major credit card. As a caveat though, store card interest rates are often higher than for a standard credit card. Credit limits are also typically low – but that might not be a bad thing when you’re just getting started building your credit. A lower limit helps ensure you’ll be able to keep up with payments. Because you’re trying to build a positive history and because interest rates are often higher with a store card, it’s important to pay on time – or ideally, to pay the entire balance when you receive the statement.

  2. Become an authorized user on a parent’s credit card.
    Another common way to begin building credit is to become an authorized user on a parent’s credit card. Ultimately, the credit card account isn’t yours, so your parents would be responsible for paying the balance. (Because of this, your credit score won’t benefit as much as if you are approved for a credit card in your own name.) Another thing to keep in mind is that some credit card providers don’t report authorized users’ activity to credit bureaus.* Additionally, even if you’re only an authorized user, any missed or late payments on the card can affect your credit history negatively.

Are secured cards useful to build credit?
A secured credit card is another way to begin building credit. To secure the card, you make an initial deposit. The amount of that deposit is your credit line. If you miss a payment, the bank uses your collateral – the deposit – to pay the balance. Don’t let that make you too comfortable though. Your goal is to build a positive credit history, so if you miss payments – even though you have a prepaid deposit to fall back on – you’re still going to get a ding on your credit history. Instead, it’s best to use a small amount of your available credit each month and to pay in full when you get the statement. This will help you look like a credit superstar due to your consistently timely payments and low credit utilization.

As you build your credit history, you’ll be able to apply for credit in larger amounts, and you may even start receiving pre-approved offers. But beware. Having credit available is useful for certain emergencies and for demonstrating responsible use of credit – but you don’t need to apply for every offer you receive.

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Source: “Does Being an Authorized User Help You Build Credit?” Discover*, 2018, https://discvr.co/2lAzSgt.

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The Advantages of Paying with Cash

The Advantages of Paying with Cash

We’re using debit cards to pay for expenses more often now, a trend that seems unlikely to reverse soon.¹

Debit cards are convenient. Just swipe and go. Even more so for their mobile phone equivalents: Apple Pay, Android Pay, and Samsung Pay. We like fast, we like easy, and we like a good sale. But are we actually spending more by not using cash like we did in the good old days?

Studies say yes. We spend more when using plastic – and that’s true of both credit card spending and debit card spending.² Money is more easily spent with cards because you don’t “feel” it immediately. An extra $2 here, another $10 there… It adds up.

The phenomenon of reduced spending when paying with cash is a psychological “pain of payment.” Opening up your wallet at the register for a $20.00 purchase but only seeing a $10 bill in there – ouch! Maybe you’ll put back a couple of those $5 DVDs you just had to have 5 minutes ago.

When using plastic, the reality of the expense doesn’t sink in until the statement arrives. And even then it may not carry the same weight. After all, you only need to make the minimum payment, right? With cash, we’re more cautious – and that’s not a bad thing.

Try an experiment for a week: pay only with cash. When you pay with cash, the expense feels real – even when it might be relatively small. Hopefully, you’ll get a sense that you’re parting with something of value in exchange for something else. You might start to ask yourself things like “Do I need this new comforter set that’s on sale – a really good sale – or, do I just want this new comforter set because it’s really cute (and it’s on sale)?” You might find yourself paying more attention to how much things cost when making purchases, and weighing that against your budget.

If you find that you have money left over at the end of the week (and you probably will because who likes to see nothing when they open their wallet), put the cash aside in an envelope and give it a label. You can call it anything you want, like “Movie Night,” for example.

As the weeks go on, you’re likely to amass a respectable amount of cash in your “rewards” fund. You might even be dreaming about what to do with that money now. You can buy something special. You can save it. The choice is yours. Well done on saving your hard-earned cash.

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Sources: ¹ Steele, Jason. “Debit card statistics.” creditcards.com, https://bit.ly/2JB9cGE. ² Kiviat, Barbara. “Going Shopping? How You Pay Can Affect How Much You Spend.” Consumer Reports, https://bit.ly/2sNQiG7.

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3 Ways to Save Money (No Formulas Needed)

3 Ways to Save Money (No Formulas Needed)

When you’re ready to take control of your finances, it can seem overwhelming to get your savings plan going.

Every finance expert has a different theory on the best way to save – complete with diagrams, schedules, and algebraic formulas. Ugh. But saving money isn’t complicated. Here’s a secret: the best way to save money is not to spend it. It’s that simple.

Turn Off the TV
The act of turning off your TV to save money on electricity may not make much difference. Running a modern TV for as long as 12 hours per day probably costs less than $10 per month.* The real expense associated with your television comes from the advertisements. Look around your home and in your driveway and you’ll probably see some of the fallout associated with watching television. Advertisers have convinced us that we need the latest and greatest gizmos, gadgets, cars, homes, and that we need to try the latest entree at our favorite chain restaurant before the deal goes away forever! Skipping the TV for some time spent with family or enjoying a good book may not only cost you less money in the long run, it’s priceless.

The 30-Day Rule
Here’s how it goes. If you want something, and that something isn’t an emergency, make a note of it and then wait 30 days before revisiting the idea of purchasing that item. Your smartphone is perfect for this because it’ll probably be in your hand when you first find the item you want to buy. Use a note keeping app or a reminder app to document the date and details about the item. After 30 days, the desire to purchase that item may have passed, or you may have concluded that you didn’t really need it in the first place. If you still want the item after 30 days – and it fits into your budget – go for it!

The 10-Second Rule
The 30-day rule is useful in a lot of cases, but it may not work so well for some types of household spending, like grocery shopping. 30 days is too long to wait if you’re out of coffee or cat litter. Even so, the grocery store is a hotbed for impulse buying – sales, specials, and check-out aisle temptations may be too much to resist. Instead of dropping items into your cart on a whim, wait 10 seconds and then ask yourself for one good reason why you need to purchase this particular item right now. Chances are pretty good – that there isn’t a good reason. Ding! You just saved money. That was easy. (Hint: Always make a list before you head to the store.)

Now that you’ve gotten rid of the idea that trigonometry + calculus + geometry = financial independence, which money-saving tip will you put into practice first? (Quick note: The 30 Day Rule does not apply here – no need to wait to get started!)

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Source: Crank, Josh. “How Much Electricity Does My TV Use?” Bounce Energy Blog*, 4.12.2018, https://bit.ly/2LZA4kq.

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Handling Debt Efficiently – Until It’s Gone

Handling Debt Efficiently – Until It’s Gone

It’s no secret that making purchases on credit cards will result in paying more for those items over time if you’re paying interest charges from month-to-month.

Despite this well-known fact, the average American now owes over $6,000 in credit card debt.* For households, the number is much higher, at nearly $16,000 per household. Add in an average mortgage of over $200,000, plus nearly $25,000 of non-mortgage debt (car loans, college loans, or other loans) and the molehill really is starting to look like a mountain.

The good news? You have the potential to handle your debt efficiently and deal with a molehill-sized molehill instead of a mountain-sized one.

Focus on the easiest target first.
Some types of debt don’t have an easy solution. While it’s possible to sell your home and find more affordable housing, actually following through with this might not be a great option. Selling your home is a huge decision and one that comes with expenses associated with the sale – it’s possible to lose money. Unless you find yourself with a job loss or similar long-term setback, often the best solution to paying down debt is to go after higher interest debt first. Then examine ways to cut your housing costs last.

Freeze your spending (literally, if it helps).
Due to its higher interest rate, credit card debt is usually the first thing to tackle when you decide to start eliminating debt. Let’s be honest, most of us might not even know where that money goes, but our credit card statement is a monthly reminder that it went somewhere. If credit card balances are a problem in your household, the first step is to cut back on your purchases made with credit, or stop paying with credit altogether. Some people cut up their cards to enforce discipline. Ever heard the recommendation to freeze your cards in a block of ice as a visual reminder of your commitment to quit credit? Another thing to do is to remove your card information from online shopping sites to help ensure you don’t make mindless purchases.

Set payment goals.
Paying the minimum amount on your credit card keeps the credit card company happy for 2 reasons. First, they’re happy that you made a payment on time. Second, they’re happy if you’re only paying the minimum because you might never pay off the balance, so they can keep collecting interest indefinitely. Reducing or stopping your spending with credit was the first step. The second step is to pay more than the minimum so that those balances start going down. Examine your budget to see where there’s room to reduce spending further, which will allow you to make higher payments on your credit cards and other types of debt. In most households, an honest look at the bank statement will reveal at least a few ways you might free up some money each month.

Have a sale. To get a jump-start if money is still tight, you might want to turn some unused household items into cash. Having a community yard sale or selling your items online can turn your dust collectors into cash that you can then use toward reducing your balances.

Transfer balances prudently.
Consider balance transfers for small balances with high interest rates that you think you’ll be able to pay off quickly. Transferring that balance to a lower interest or no interest card can save on interest costs, freeing up more money to pay down the balances. The interest rates on balance transfers don’t stay low forever, however – typically for a year or less – so it’s important to make sure you can pay transferred balances off quickly. Also, check if there’s a balance transfer fee. Depending on the fee, moving those funds might not make sense.

Don’t punish yourself.
Getting serious about paying down debt may seem to require draconian measures. But there likely isn’t a need to just stay home eating tuna fish sandwiches with all the lights turned off. Often, all that’s required is an adjustment of old spending habits. If your drive home takes you past a mall where it would be too tempting to “just pick a little something up”, take a different route home. But it’s important to have a small treat occasionally as well. If you’re making progress on your debt, you deserve to reward yourself sometimes. All within your budget, of course!

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Sources: El Issa, Erin. “2017 American Household Credit Card Debt Study.” NerdWallet*, 2017, https://nerd.me/2ht7SZg.

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Creating Healthy Financial Habits

Creating Healthy Financial Habits

When it comes to building wealth and managing finances well enough to live comfortably, it’s up to your participation in a long-term financial strategy, which – more often than not – depends on creating healthy financial habits NOW.

Check out these ideas on how you can do it!

Automate it
Fortunately for us, we live in the electronic age, which can make streamlining financial goals a lot easier than in decades past. Whether building savings, investing for the future, paying down debt, or any other goals, take advantage of the apps and information available online. Savings can be put on autopilot, taking a fixed amount from your bank account each month or each pay period. The same can be done for IRAs or other investment accounts. Many mobile apps offer to automatically round up purchases and invest the spare change. (Hint: Compare your options and any associated fees for each app.)

Be mindful of small purchases
It can be much easier to be aware of making a large purchase (physically large, financially large, or both). Take a physically large purchase, for instance: it’s difficult to go into a store and come out with a washing machine and not have any memory of it. And for large financial purchases like a laptop or television, some thought usually goes into it – up to and including how it’s going to get paid for. But small, everyday purchases can add up right under your nose. Ever gone into a big box store to grab a couple of items then left having spent over $100 on those items… plus some throw pillows and a couple of lamps you just had to snag? What about that pricey cup of artisan coffee? Odds are pretty good that the coffee shop has some delicious pastries, too, which may fuel that “And your total is…” fire. $100 here, $8.50 there, another $1.75 shelled out for a bottle of water – the small expenses can add up quickly and dip right into the money that could go toward your financial strategy.

Paying with plastic has a tendency to make the tiny expenses forgettable… until you get that credit card bill. One easy way to cut down on the mindless purchases is to pay in cash or with a debit card. The total owed automatically leaves your wallet or you account, perhaps making the dwindling amount you have to set aside for your financial future a little more tangible.

Do what wealthy people do
CNBC uncovered several habits and traits that are common among wealthy individuals. Surprisingly, it wasn’t all hard work. They found that wealthy people tend to read – a lot – and continue learning through reading.¹ Your schedule may not allow for as much reading time as the average billionaire – maybe just 30 minutes a day is a good short-term goal – but getting in more reading can help you improve in any area of life!

Another thing wealthy people do? Wake up early. This may help you find that extra 30 minutes for reading. You’ll get more done in general if you get up a little earlier. A 5-year study of self-made millionaires revealed that nearly 50% of this industrious group woke up at least 3 hours before their work day started.²

Making these healthy financial habits a part of your regular routine might take some time and effort, but hang in there. Often, success is about the mindset we choose to have. If you stay the course and learn from those who’ve been where you are, you can experience the difference that good habits can make as you keep moving toward financial independence!

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¹ Paine, James. “5 Billionaires Who Credit Their Success to Reading.” Inc., https://bit.ly/2LvAM94. ² Elkins, Kathleen. “A man who spent 5 years studying millionaires found one of their most important wealth-building habits starts first thing in the morning.” Business Insider, https://read.bi/2aXjejh.

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Tips on Managing Money for Couples

Tips on Managing Money for Couples

Couplehood can be a wonderful blessing, but – as you may know – it can have its challenges, too.

In fact, money matters are the leading cause of arguments in modern relationships.* The age-old adage that love trumps wealth may be true, but if money is tight or if a couple isn’t meeting their financial goals, there could be some unpleasant conversations (er, arguments) on the bumpy road to bliss with your partner or spouse.

These tips may help make the road to happiness a little easier.

1. Set a goal for debt-free living.
Certain types of debt can be difficult to avoid, such as mortgages or car payments, but other types of debt, like credit cards in particular, can grow like the proverbial snowball rolling down a hill. Credit card debt often comes about because of overspending or because insufficient savings forced the use of credit for an unexpected situation. Either way, you’ll have to get to the root of the cause or the snowball might get bigger. Starting an emergency fund or reigning in unnecessary spending – or both – can help get credit card balances under control so you can get them paid off.

2. Talk about money matters.
Having a conversation with your partner about money is probably not at the top of your list of fun-things-I-look-forward-to. This might cause many couples to put it off until the “right time”. If something is less than ideal in the way your finances are structured, not talking about it won’t make the problem go away. Instead, frustrations over money can fester, possibly turning a small issue into a larger problem. Discussing your thoughts and concerns about money with your partner regularly (and respectfully) is key to reaching an understanding of each other’s goals and priorities, and then melding them together for your goals as a couple.

3. Consider separate accounts with one joint account.
As a couple, most of your financial obligations will be faced together, including housing costs, monthly utilities and food expenses, and often auto expenses. In most households, these items ideally should be paid out of a joint account. But let’s face it, it’s no fun to have to ask permission or worry about what your partner thinks every time you buy a specialty coffee or want that new pair of shoes you’ve been eyeing. In addition to your main joint account, having separate accounts for each of you may help you maintain some independence and autonomy in regard to personal spending.

With these tips in mind, here’s to a little less stress so you can put your attention on other “couplehood” concerns… Like where you two are heading for dinner tonight – the usual hangout (which is always good), or that brand new place that just opened downtown? (Hint: This is a little bit of a trick question. The answer is – whichever place fits into the budget that you two have already decided on, together!)

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Sources: Huckabee, Tyler. “Why Do People In Relationships Fight About Money So Much?” Relevant*, 1.3.2018, https://bit.ly/2xiflG9.

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