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We’re Going Broke At a Slower Pace

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Newly released averages from TransUnion, one of the credit bureaus shows what we talked about recently. We’re increasing our borrowing, but at a slower pace. Great. Kind of like someone on a diet just having three pieces of cake, instead of four. We’re still growing our debts which are already significantly too high.

On average we owe $3,600 on our credit cards. But remember that about half of Canadians pay their balance in full – hurray. So the rest of us owe over $7,200 – and that should be a concern.

Lines of credit are now over $35,000 on average. But think back not that many years ago. We used to get a personal loan if we wanted to borrow $10,000 for renovations or $15,000 for a motorcycle. Well, making a loan costs the bank about $200 to $300 in setups, credit reports, etc. So they moved us to lines of credit. Now a loan had a three, four, or five-year term of fixed payments. Make all the payments and you were done with this debt. Yet, a line of credit makes us the loans officer. We can pay as little as interest only (newsflash: Most do) or as much as we want. We were sold on convenience and hardly anybody gets an actual loan these days, with the exception of vehicles. Now we can pay as little as we want and the banks don’t have to keep making new loans.

The downside is that now, on average, we take more than a decade to pay off our lines of credit. That’s assuming we don’t just roll them into a mortgage refinance. It used to be four years of loan interest, now it’s a decade or more of payments. Great for the lenders, very bad for us. Without much of a rise in incomes and all the other monthly payments, it’s just natural to fall back on the least amount we can pay – and we do.

Banks really do have the brightest marketing minds in the country. They’re so great at selling us something that they make a profit on and helping us with our going-broke plans.

What’s Your Credit Limit?

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What’s an expensive night out? I’m thinking $100 maybe $200 tops. Well, there are people with much higher budgets for a night on the town than you or me.

We talked in 2011 about the six Boston Bruin’s players who charged up $158,000 at the Foxboro Resort to celebrate their Stanley Cup win. But if you thought that was expensive – not really:

Could you charge $241,000 on your credit card? Apparently Robert McCormick managed to do it on his American Express. The CFO of Savvis Inc., a Missouri Internet hosting company expressed concern on the company web site that most people had never heard of his firm. That’s all changed now after some huge media coverage. You see, one night two years ago, his boss, Robert McCormick took some clients to a New York “gentlemen’s club” called Scores.

We don’t need to get into the details, but suffice it to say that Scores claimed he spent time with as many as 15 of their dancers for an all-night event. Even with drinks at $22 a pop, it takes a lot of effort to run up $241,000 in charges. But then the vast majority was apparently in tips for these ladies. The reason it came to the attention of the public? Well, it turns out his company is refusing to pay the American Express bill. They are disputing the amount and accusing Scores of “padding” the bill, something the New York Attorney General is investigating. At this time, Mr. McCormick is suspended and American Express has sued for payment. There is an ending to this in that Amex settled for an undisclosed amount and Scores is now out of business.

It’s another valuable lesson that a credit card should stay in someone’s wallet…and pants.

That must be some kind of limit. But then, maybe you’re more like Brittany Spears. According to The Insider on ABC, she couldn’t get her credit card approved at Barney’s in New York. And then it was: Ooppss I did it again – when her second card was also rejected. However, her bodyguard stepped up to cover the purchase on his card.

Best guess: It’s been reported that her husband Kevin loves to spend and apparently she cancelled a number of credit cards for just that reason.

According to In The Money, J Lo also had hers declined before Christmas at a fundraising gala when both her credit cards were maxed out.

I Bought A New Car…Sort Of…

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Last month I bought a new car. No, it isn’t new, new. It’s a five year old Ford Fusion, but I love it and I can afford it – something most people don’t think about until it’s too late!

No matter what the incentives, there is no chance I’ll own a new vehicle and pay the average 20 to 30% depreciation in the first year. And low-rate financing doesn’t interest me, because adding interest costs to a car makes things worse and more costly. That isn’t going to happen, because a car payment is the biggest monthly cash flow robber, and I would always be financing something that is worth less and less each month. It’s next to impossible to get ahead, financially, being buried in car payments. Want proof? The average millionaire drives a three-year old vehicle. Here’s another story: Afred Morris of the Washington Redskins signed a $2.2 million contract with his NFL team. Yet he continues to drive his 1991 Mazda 626. “One day, my kids are going to drive that car. If it breaks down, I’m getting it fixed. That’s just how I am,” shares Morris in a Yahoo Sports interview.

In my case, since new wasn’t really new, I was happy to just write a cheque for $6,500 for my Fusion. What I did want to figure out, without attempting to be smarter than a fifth grader, is the real cost to drive my old Buick.

With some easy math, it turns out that my Buick cost me $92 a month to drive. What does your vehicle cost you a month? I love that, because it’s down from the $133 my previous Chrysler cost, but nowhere near the family record of my brother Chris who drove his Olds Achieva for under $70 a month!

To figure out your real cost of driving, just take the price you paid plus any repairs you’ve spent on the car. Don’t include any maintenance, insurance, etc. because you’ll have that on any vehicle. In my case, I had paid $2,400 for the Buick and spent $2,200 in repairs. Deduct the sale price, because it’s money you got back. My Buick found a new home for $800. So price plus repairs minus sale is $3,800. Now I just need to divide that by the number of months I drove the vehicle, which was 41. A $3,800 cost for 41 months made it $92 a month. Compare that to the average vehicle payment of $440 and you get the point.

Vehicle Cost to Drive:

Original cash price of the vehicle: $__________
Or:
The total of all payments:
(add up all the monthly payments, because
this will include the interest you paid to
finance the vehicle) . $__________
Or:
On a lease, add the monthly payment with
taxes AND the end of lease buyout amount
$__________

Add the rough total of any repair bills: $__________

Do not include insurance, gas, basic maintenance, such
as oil changes, tires, etc. Yes, they have to be paid, but
they won’t be too different between vehicles.

Subtract the current value of the
vehicle, or the actual sale price: $__________

Equals the total cost to own: $__________

Number of months you owned the vehicle __________

Your cost per month: $__________
(Divide the total cost to own by the
number of months you’ve owned it)

If you believe that a vehicle is a status symbol, you are likely destined to be broke. If, however, you think of a vehicle as basic, reliable transportation, you will likely be way ahead of millions of people, financially. And remember three other points which will help you to avoid making your vehicle into a money pit:

Avoid having a finance payment on your vehicle at all costs.

If you have one, keep the vehicle after it is paid off and re-direct the same payments to a savings account. You won’t miss the money – you’ve been paying it all these years. But now it’ll grow for you, instead of going away.

If you are in a lease – get out. There is very little chance you will ever have any equity and all those payments are just treading water before you’ll likely be giving the vehicle back to the dealer.

More of Getting Financially Fit for 2013

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Last week I promised that we’d talk about some specific small steps you can take to change your finances around. Why small steps? If it’s too big, your sub-conscious mind will revolt against huge goals which seem impossible to reach.

You’re not going to lose 60 lbs, but you can lose a pound a week. You won’t run the marathon this summer, but you can go for a 15 minute walk each day. You also won’t be debt free by March, but you can start on that journey with one step at a time.

Resolve to say no: Whether it’s to yourself when it comes to spending, to your kids, people at work, or anywhere else. It’s the one word that’ll change your financial life and overspending.

Set yourself a credit limit for the next month. Pick a dollar figure below which you’ll pay by debit card or cash. Maybe $20 or $30 bucks – that’s it. Anything below that, you’ll pay with real money, instead of running up debts. It’ll become a great habit and will cut down your credit card balance in huge ways.

Take your credit cards out of your wallet for two weeks. You don’t need them just to go to work and home. That way the temptation and impulse spending is gone. Take a $20 bill and hide it in your wallet or purse for an emergency. If it’s really for an emergency you’ll still have it in there in six months. With credit cards we spend 12 to 18% more than paying by debit card or cash. When you don’t have them on you, you can’t overspend.

Keep your car for another year. If you believe a cool car is a status symbol and a must-have, you’re doomed to be in debt for decades to come. Not to mention that almost 50% of people trade their vehicle and STILL owe more than it’s worth. The goal should be to drive a reliable vehicle that doesn’t have payments with it, which are killing your chances to save, or to get ahead financially.

Annual bills kill your budget, but they’re not a surprise. You know they’re coming – but you don’t have the money to pay them. Open a savings account and add up what you’ll need for next years’ Christmas bills, your property tax and car or home insurance. Divide it by 12, and put that amount away monthly. A small amount each month is doable, a huge bill sets you back months.

Pay off one bill. Minimum payments buy you another month – nothing more, and it’s treading water. Credit cards and debts are not your friend. They’re financial dream killers, suck money out of your pocket, and add a ton of stress to your life and your relationship. Take your smallest bill and put every dollar you can towards it while paying minimum payments on everything else. When it’s gone, you know it’s not coming back. If you want – and you should – take the next smallest and focus only on it. This step-up plan will get you debt free in less than half the time. It’s an entire section of the It’s Your Money book and will change your financial life forever.

Test drive these six suggestions for the next two weeks or the rest of the month. It’s not overwhelming and it’ll be easier than you think. Then you can choose to carry on with some or all of them for another month. By that time, it’ll be habit and part of your life. If nothing else, at least resolve to make this the year where you spend more time planning your finances than your vacation.

Getting Financially Fit for 2013

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Happy New Year!

New Year’s resolutions don’t work most of the time because we tend to make them too big, too overwhelming and not specific enough. But when our resolutions don’t come true, it’s decision time: We can get back at it and try again, or just go back to that “what’s the use” mindset and deal with it again next year. If nothing changes – nothing changes.

I recently heard some feedback from a couple of people who were pretty disciplined in paying for Christmas shopping with cash – hurray! Unfortunately, they fell off the “cash only” wagon on Boxing day. Well, nothing happens in a straight line. One day of brain damage, or credit card damage, isn’t a reason to give up.

The good news: It’s a new year! It’s a chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? You’re already broke! How’d that happen? Well, we spend more than 160% of our disposable income. That means every dollar you’re going to earn this year is already spent and spoken for. If that isn’t sick enough, half of us have no savings, and almost 70% of us don’t even make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich and there’s simply nothing left at the end of the month.

And for 2013, I wish you:

Three months of emergency savings
A debit card in your wallet and a credit card at home for emergencies
A zero balance line of credit
And being overdraft free

Twas the Week Before Christmas and All Through the Malls….

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OK, that’s it for my ability to rhyme. But retailers sure are excited that this December brings an extra weekend of shopping. So, complements of Dave Ramsey, here are nine kinds of Christmas shoppers:

The ‘Oh Darn!’ Shopper: Someone who just realized he didn’t get anything for his wife yet and never did order that fancy whatyamacall it for his son. You can spot him by the confused expression and borderline panic mode. Give him room – he’s quite desperate.

Miss October: Ah, a shopper who’s way ahead of the game. She finished shopping more than a month ago. I know, because I’ve seen the Facebook posts to proclaim that. You won’t see her in the stores, but if you do know her, don’t be envious – just ask her for organizational advice.

The Repeat Offender: This is someone making their 8th trip to the mall because they keep forgetting this or that. Eventually they’ll get it all…and then forget the wrapping paper…

The Online Shopper: This person was in a store once about two years ago, but it was just too much information, no time to think or research, and too busy. He hasn’t been in a store since, settling for the 21” computer screen, a couple of clicks, and hoping the stuff will get here in time.

The Scattershot: This person is like my cat playing with this and that, then this, then getting sidetracked again. Oh look, that’d be great, so would this and that, and look over here….I’ll take them all!

Mr. Platic Fantastic: This person really never sees the actual inside of a store but just hangs around the front cashier purchasing 23 gift card in five minutes. Nothing says ‘I thought this through and made it special’ more than a gift card. But Christmas shopping did get done in eight minutes.

The Mall Rat: Everyone knows this person because they’re constantly in the mall, just not getting paid to be there. They’re not homeless or lost – just wander around endlessly. Christmas is a great time to spend in the mall, touching stuff, looking, wandering the isle and maybe eventually buying something…sometime…soon…

Mr. Road Rage: OK, the pressure is on, time is short, and everybody needs to get out of his way. You can already spot him in the parking lot cutting people off, trying to cut into the cashier lineups, and generally upping everyone’s stress level and sucking the Christmas spirit out of everybody.

The Heroic Mom: This Christmas shopper goes to the mall on weekdays only. You can spot her with two to four kids in tow. She’s answering her cell, feeding her youngest one, rounding up the wandering oldest, and talking to the cashier at the same time without breaking a sweat. She’s been known to purchase 17 presents, cards, and wrapping paper inside of an hour, on a fixed budget while reading the Christmas story to her kids and moving swiftly through the mall. THAT qualifies for the Christmas shopping hall of fame while her husband is in one of the other categories, and best not left to go out on his own.

New Debit Card Fees & Some Bank Insights

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Last week the federal government announced a discussion period for some prepaid credit card changes. They’re most welcome and long overdue, but they sure don’t go far enough. What the proposed changes include are:
-No expiry for prepaid credit cards
-Fees must be prominently disclosed in advance of purchase
-No maintenance fees for at least one year.

Now help me with this? When are these things a problem when you have cash? Right – they never apply! It’s ok to charge a monthly maintenance fee after a year? What? Does cash expire in the same way? With cash, do you have to look for the traps of fees? Enough said…

There is also a bunch of news from the world of our no-service big six banks:

Scotiabank is now marketing American Express Gold cards. They’re the only Canadian big bank and it’s not the real Amex charge cards, just the Gold credit card with travel points. It’s nice to see the market expanding and they’ve sure done a lot of advertising for it!

The TD had a big announcement last week: They are buying the US credit card portfolio of Target. The total of Target credit card balances is just under $6 billion and the deal is for seven years. That likely means TD will handle the Canadian Target Visa cards when they launch in Canada in March. And, as we discussed a few months ago, the rumour is that Canada will also have the permanent 5 percent discount on any shopping with their Visa card. So skip the Amex Gold and wait for the Target Visa if that’s true.

The Royal, also last week, purchased the Canadian operations of Ally Financial. Do you remember GMAC? It was the finance division of General Motors and THE most profitable part of their portfolio. No wonder when most people finance and don’t shop around for their loan. Well, GMAC was sold when GM was in big trouble. Then they got into even bigger trouble with the US financial meltdown and the government allowed them to convert into a bank. That became Ally, which is now part of the Royal. It’s still massively profitable and the Royal outbid 15 companies and paid $3.8 billion.

Dollar Cost Averaging Your Investments

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As we head into year end, and the RRSP season, lots of people are going to make a one-time annual contribution. Others are scrambling to get an RRSP loan so they can have the tax receipt. Both of those give someone an instant pot of cash to invest. In the case of an RRSP loan it also makes sure that person really doesn’t have the money to contribute because they’re making payments on last years’ loan. Not a good idea. I’d rather have them not contribute for one year and start immediately on a monthly plan for next year, which is actual real money, and not borrowed.

But for both these examples, a ton of people will have one lump sum of money to invest.
While we normally do not talk about investments, there was a story a couple of weeks ago that was so powerful it is worth sharing and certainly timely. While I believe investing comes after becoming debt free, except the mortgage, many people are in that enviable position.

One of the Wall Street Journal writers recently went back to the great depression and figured out how an investor would have made out in a market that went down 89% from its peak.
He took an index fund of 500 companies and calculated the returns. Now the story we hear in the media is that an investor at the height of the market in 1929 would have taken until 1954 to get back to even. Sick story, and probably enough to keep most people out of investing.

But someone who dollar cost averaged did incredibly well in a bad market. Dollar cost averaging is taking the same amount of money and investing it each and every month. The months the market is up, that money just buys less shares. The months the market is down, it buys more shares. So over time, it rides the peaks and valleys of the market.
Now, someone who started investing $100 a month at the absolute height of the market in September 1929 would probably be a huge loser, right? Wrong. Starting the worst week in the stock market with the same investment every month, that person was already even again in 1933. Now remember, those who dumped their money in all at once took until 1954 to break even. By 1936, still in the depression, the dollar cost averaging person had doubled their money. And by 1954 when everyone else was just back to even, they were up ten fold!

The difference is that you either pick the 5th horse in the 7th race or you are betting every horse in every race. Which one do you think is the guaranteed winner?

Goodbye ING

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Last month, Scotiabank purchased the on line bank ING Direct Canada for $3.1 billion. This un-bank as they called themselves started in 1997 and grew to 1.8 million customers through great savings rates, which were often double that of the big banks, competitive mortgage rates, and a lot of innovation.

Around the world our six Canadian no-service big banks are knows as being rather conservative. In some ways that was a blessing in the banking meltdown, but they’re also turtles in any innovation and modernization. Recently we talked about the technology that lets you just scan a cheque on your smart phone and have it instantly show up in your account. No need to head to the bank, just scan and done. Well, two of the banks had never heard of this when I contacted them. I guess they don’t watch TV as almost every US bank now has this in place already.

ING was instrumental in getting all North American banks to focus on on-line banking, customer service and the likes, or they still wouldn’t have much of it. Two of the biggest changes caused by ING’s success are just rolling out: Paypal, which everyone under age 30 is familiar with, is teaming up with Discover to become a bank. Plus, Amex and Wal Mart are in a joint partnership and will offer banking to the 40 million Americans who do not have any bank accounts. They’ll be able to get a pre-paid debit card, actual cheques, and be able to do all their transactions at any cashier in any Wal Mart. No fees, no overdrafts, no minimum balances – and it all started with ING leading the way.

Now our Canadian banks can slow down again, because one of them took out ING. Scotia won’t be continuing their operation and ING will disappear. Hopefully, if you were one of their customers, you’ll switch over to President’s Choice. Unfortunately it’s one of the only on-line banks left, even though they’re owned by CIBC.

Competition is great for us consumers. Unfortunately, another one bites the dust, and we’re all going to be worse off as a result. Scotia is betting they can retain most of these 1.8 million customers. But with all the banks, you have to remember that your loyalty will never ever be rewarded. The longer you deal with them, the more you’ll be taken for granted.

But the last thing we do is to shop around for a better rate, much lower service charges, or a place where it doesn’t take an appointment two days from now to see someone.

The “Average” Person’s Debts

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Maclean’s magazine had a small section on our average debts that was quite interesting. And, according to Statistics Canada, the average person in debt isn’t an unemployed renter in their 20s.

Some of the information is quite eye-opening:

In total debts, BC and Alberta run neck and neck for a record we really don’t want to have: BC averages $155,000 in debt per family while it’s $157,000 in Alberta. Only Ontario is close at $125,000.

Don’t think high income earners are always savers. We’ve talked before that the more income you earn, the less likely it is that you’ll live on a budget or are careful about your spending: 57% of the total consumer debt in the country is owed by people who make more than $100,000. But they’re a tiny group in the population! Ah, but they’ve got the income to pay the big mortgage, car, and credit card payments. No, not to pay them off, just the payments each month assuming there isn’t a hiccup in their earnings.

What’s strange is that people who have the most debt claim that they are the most financially literate. Is that backwards or what?
45% say they’re very financially literate owing over $250,000
35% respond the same way owing $150, 000 to $250,000

One sad fact is something we talked about before. It’s the 65 and older age group who still average $66,000 of debt.

The age group of 45 to 64 has $103,000 of debt. So, in the highest earning years of our 40s and 50s we manage to pay off only $37,000 of debt? Any family in the 40 to 50 age group likely has their kids moved out and still can’t save OR pay off debts? That’s cause for concern and sad.

In a US survey done by the Consumer Federation of America, along with Primerica, the average respondent admitted they had made at least one financial mistake averaging $23,000. THAT is one expensive lesson, and for many people not something they’ll recover from for decades.