Tag Archives: debt

Someone Asking for Help – and I’ve Got Nothing…

Welcome to my very depressing day! My 11-year old car has a cracked thermostat cover, which translated to no heat for the last two weeks, and getting to part with $485 today.

But if that seems bad, it’s also the first time an emailer has me really depressed. Others email me and I respond with what I would do in their situation. I have no idea if they ever take the advice or if they were just looking for a quick way out – there never is one.

But this person is in it deep. I emailed him back to first decide if he wanted some painless solutions that’ll just have him in the same financial nightmare in a decade when he’s retired, or if he’s prepared to do what it takes. In other words: Not have a life for the next 18 months to work his way out of a huge hole. Today, I’m actually hoping he doesn’t email me back because this isn’t solvable for five more years. OK, I didn’t mean that, but I can explain why I said that in frustration:

He has a vehicle financed for eight years. Yes, you heard that right: EIGHT years. AND it’s one of the fastest depreciating vehicles around AND it’s a pig on gas. Right now, after two years of payments, his balance is $44,000. The most optimistic sales value today is half of that. Yup – he’s $22,000 in the hole – and won’t be at a balance that equals the value for another five years.

That’s bad enough, but the payments are $650 and $350 gas and $130 insurance and around $70 maintenance. That’s $1,200 a month. So he has to earn $2,000 of gross income, pay taxes, EI, CPP, etc. to have $1,200 left over.

So if $2,000 of his pay is gone right off the top, plus rent, plus food and normal bills, where is the ability to pay off or to pay down a $30,000 credit card, or $25,000 line of credit? With what money? Saving $50 on food won’t cut it. The car can’t be sold in order to drive a $3,000 vehicle for a couple of years, and there aren’t savings on utilities, cable TV or a $50 cell plan.

How exactly am I supposed to help this person? Oh boy, this is depressing. And he didn’t get ripped off on the vehicle – he did this to himself. Again, I’m not anti-new vehicles. I’d love to own one and would love you to drive a new vehicle. But only if you can afford it – and certainly never on the eternal eight year finance plan. The definition of afford it is to be able to write a cheque for the purchase! An eight year loan is not in the definition of being able to afford it!

I’m going to live for the day when someone emails me for help the day BEFORE they put themselves into a situation where there’s no way out!

George Boelcke – Money Tools & Rules book – yourmoneybook.com

It’s Grad Season

Happy May to the two types of graduates: Those who are graduating from high school, and those graduating from university.

If you’re now entering the work force, your life is going to be radically different. If you’re still living at home, you’ll now have money coming in with only a limited number of bills to pay. If you’re also moving out of the dorm, or your parent’s home, the bills can quickly to exceed your income. That could likely make you more broke than you’ve been BEFORE you started earning a paycheque.

If you were to be honest with yourself, you’ll admit, at least to yourself, that you stopped listening to your parents advice quite some time ago. Bad news: You’ve now got very little time to get your financial house in order. More bad news: You (and most of the country) isn’t really financially literate. Even more bad news: You’ve got a ton of pent-up wants and needs that you’re going to purchase with little money. And the worst news: Your income, and the fact that you have a small credit rating, lets you borrow.

With rent, a car payment, some utilities, your cell phone bill, credit card payment, and needing to eat, I’d bet most of your 2019 paycheques are spent. Yes, you read that right: Those debts have payments that aren’t going away anytime soon because you have a two-year cell contract, do need to live somewhere that charges rent, and have a car payment until 2023 or longer.

Adults can take a long time to go broke. Graduates often accomplish that in just a few months. When you get there – you can’t get out for a decade or longer. Ask anyone in their 30s what they’d do differently with their finances if they could be your age again.

Maybe somebody in your family will go down to Mosaic Books or Amazon and invest the $20 to gift you the Money Tools and Rules book. You can read a few of the chapters in an hour or less. Read the “Broke is the new rich” chapter. That’ll explain how that doesn’t need to be your life. Read the chapter on specific things to do or not do for just one year after you graduate, and the how to buy a vehicle chapter. Since you have a credit card, read those 30 pages to see how they become your worst nightmare no matter what their ads tell you.

Knowledge is power. You learned that in high school or university. However, your financial learning is just starting, and this is one lifetime course you definitely can’t afford to fail.

Borrowing Doesn’t Come With Warnings Or Permission Slips

When we borrow money, get the student loans, two or three credit cards, or line of credit that won’t be paid off for an average of 16 years, we just need a decent credit score and a paycheck. Nobody talks us through it first, nobody (especially the lender) gives us any warnings, and we sure don’t need a permission slip to jump headlong into debt.

To explain that, I want to play a TV commercial for you. This is an ad for Cymbalta. I’m not picking on them – these commercials are all pretty typical by law. But I want you to really listen to it. I want you to count how many warnings there are embedded in this one minute ad. Are you ready? (You can click this youtube.com link for the ad:

What did you come up with? In total there are more than 25 pretty serious warnings in this ad. I used one for an anti-depressant because that seemed appropriate when our debt levels keep rising, almost half the population couldn’t find $400 for an emergency, and two-thirds couldn’t miss one week of pay without serious financial trouble.

The point is that this is an ad for a prescription. You cannot even get it filled without first seeing a doctor. A professional with at least six years of medical training has to examine you, explain it, and then – maybe – write the prescription.

Do you see the irony of this? You cannot just go get this medication. Yet, in the world of borrowing, there are way more than 25 warnings that you really should know. But nobody does – few people asks, because they don’t really know what to ask, what to avoid, how to negotiate, etc.

THAT is the reason the Money Tools and Fighting Back book is so critical. It’s the medical warning equivalent for every type of borrowing and then the part of paying it off. Lenders have no obligation and no interest in having you financially educated – none!

Whether you’re 18 or 80, the book is THE best present you will ever get for yourself, or gift to someone. The $20 for the book turns into tens of thousands of dollars. It’s a must-have and must-read until lenders have to provide the same warnings as drug companies do.

80% of teenagers never take a class on financial literacy, then we set them loose to sign for student loans, then their first credit card, then they sign for a bad cell phone contract, and not long after that, for a car loan with no financial knowledge. At some point, they may get a mortgage, and the 70% chance they’ll sign up for a line of credit, too. By the time they’re 40, they’re broke, have no idea how to dig themselves out, or what to do. Then, they have kids and pass zero financial knowledge onto them. It’s true: 80% of parents do not talk to their kids about money and finances.

Broke People Can’t Stimulate the Economy

 

The Bank of Canada issued a statement last week that our debt loads are killing any kind of economic growth. Well, that’s stating the obvious. Broke people can’t help stimulate the economy. Just ask the U.S. what 2008 to 2011 was like. When both Canada and the U.S. have about 75% of the economic activity being consumer spending – when you and I cut down our spending, there’s trouble.

Less consumer spending leads to less retail sales, less manufacturing and less economic activity everywhere. The next wave is less hiring or layoffs, and the vicious cycle escalates.

But it’s not your job to stimulate the economy with borrowed money. That’s a financial suicidal pyramid scheme. At some point, you’re out of money, out of room on your credit card, and can barely pay the payments  you already have. But that’s what the government needs you to do in order to keep the economy growing. So, on the one hand they’re tightening up mortgage rules to cool down the market and warning that our debt to income ratio is over 160%. On the other hand, they really need us to keep spending so the economy picks up. Yup, it’s a vicious cycle with totally mixed messages: On the one hand they kept lowering interest rates to make borrowing easier and cheaper, on the other hand they hit the brakes with more mortgage restrictions to not overheat the housing market.

I talked to a lady last week that was really concerned that her husband’s hours would be cut back. They really need to keep earning their $70,000 family income or they’re in real trouble. In other words, they’re buried in debt from previously helping out the economy so much. Now they’re out of the spending business because they “need” every dollar of earnings to just keep their head above water. And that story applies to millions of Canadians. It was fun while it lasted – but they’re now in the middle of one giant hangover.

For teenagers, the number one favourite activity is going to the mall. Teenagers help the economy. They’ll spend $10 or maybe even fifty bucks. But when they’re out of money – they’re out of money. They don’t have access to credit cards. While teenagers are a big part of economic activity, it’s all with real money and not borrowed funds.

That’s why tons of teenagers are richer than their parents. Sure, the parents have a lot more money each payday. But within 48 hours, that’s all spent and gone…and then some… on credit cards or lines of credit. Teenagers don’t have that curse or opportunity.

I’m all in favour of helping the economy – right after you help yourself and get to be debt free. Then you’re contributing to the economy with real money!

It’s Expensive to Pretend to Be Rich

 

In broad terms, the most common goal for most people is to save money and get out of debt. It costs a lot more money to pretend to be rich, than to actually become rich. There isn’t a difference between a $40 pair of jeans and one that costs $400. Except one thing. When you know what that is, and how important that difference is to you, I can predict your financial destiny.

Pretend wealth means the latest, greatest whatever. Whether it’s fashions or the newest gadget, cars, shoes, or sports gear. It also means these things need to be replaced every season, or with every new model. That gets very expensive. My iPhone 4 works fine – but there are millions of people who had a four, then a five, now a six, and can’t wait for the iPhone 7 to come out soon.

That’s money spent that can’t be saved in just keeping up. No, you won’t take every dollar you save on skipping one season’s fashions and put it into investments. You’ll read that from some people, but it isn’t real life. But saving $200 to $400 a month builds wealth. It’s not flashy, nobody knows it, nobody can actually see it, but it’s real and it’ll grow and grow.

You’ve heard and read the sentiment of pretty much resenting the “top 10 percent,” or that the top one percent keep getting richer. Well, it’s kind of unfair. Most of those people skipped the “gotta impress people” stage and started saving. Years later, their investments grew to hundreds of thousands of dollars. THAT is how they keep getting richer while the image-people keep spending and going broke.

Yes, the top 10% have it made. A $50,000 investment that took years to build will grow $5,000 or so every single year on auto-pilot. The image people spend that a year on credit card payments. It’s not a fair fight or comparison..

Someone on Facebook with me lives in a winter city. He started Facebook posts in September when he bought a super-expensive exotic sports car. Hundreds of likes and comments every month or so. I bet those people are really envious. Well, it turns out it’s a three-year lease at $1,300 a month. He’s still re-posting pictures of it every few months to keep getting the bang for the impressing-you buck…even the six months he can’t drive it..

In three years, he has to return the lease, or pay the lease buyout with another loan. He’s out $50,000 or so in payments..but has hundreds of FB likes and people who are super impressed…versus the $50,000 in investment…There’s a difference – a big difference.

The Two “Best” Financial Inventions?

Business Week magazine recently ran the 85 most disruptive inventions in the last 85 years. I was a feature to correspond to their 85th anniversary. Two of them were finance related. One is the best and one…I’m not so sure:

Fixed rate mortgages: You bet that was one of the best and most disruptive inventions. In 1933, the Home Owner’s Loan Corporation introduced the first 15-year fixed home loan in the U.S. It’s now the foundation of the housing market and came as a result of the 1929 stock market crash that sparked massive waves of foreclosures. To create stability, Home Owner’s Loan rolled out a fixed way to fully pay off your mortgage inside of a reasonable period of time. Critics thought it was insane and un-American to put people into debt for 15 years. They were dead wrong, of course. And an entire generation benefited from it where, by the end of the 1950s, 62% of households were able to own their own home. Of course, the terms kept increasing along with housing prices. Then, in a bad detour, all kinds of kinky, borderline legal, exotic, and hard to understand mortgages were rolled out in the mid 2000s. We all know how that blew up. In Canada our detour wasn’t that kinky, it was just 35-year mortgages for a while. Today, it’s back to the standard US 30 year mortgages issued for over 90% of new loans. Or the standard 25-year loans here in Canada.

The second one sure made me think: What do you think is the most effecting single word that managed to automatically double sales of anything? It’s the word “credit,” the other most disruptive invention, according to Business Week. Whatever the product, if you can finance it – sales at least double..and in cases of vehicles – increase tenfold since 90% of them are financed in one way or another. It was something to be avoided at all cost, something embarrassing, shameful, and never talked about back then. It was debt – and that was to avoided at all cost. A little..ok..a lot..of marketing changed the word to credit, and the perception that that was OK to have and…here we are. Broke nation…us, corporations, and governments…One small word which can buy us so much happiness and so many things…but whose consequences can be so ruinous…

Government Debt vs. Ours – Is It Fair to Compare?

Now that the Canadian Federal Election is a month behind us, what are we in for? If you voted Conservative, it’s nice to see there’s a majority government and we won’t be spending the $300 million on an election every two years.

If you’re not Conservative – don’t worry about it – that’s not a true conservative government that’s elected in any event. Partly, because us Canadians wouldn’t want it, or tolerate it.The budget two weeks ago had $37 billion in deficit. That’s more spending than income. And the government will take four years to get out of the hole. If you’re spending more than you’re earning, four years puts you into bankruptcy, and you had better deal with this BIG problem sooner.

You may also realize that nobody is talking about our $500 billion debt. That’s no different than most of us individuals. We only really want to focus on making it through each month, and thinking about our total debt is way too depressing. Well, you cannot change what you don’t acknowledge. But….let’s not talk about that, or even think about the total staggering amount of debt…. Right now, however, that debt takes $40 billion of interest payments. That’s the deficit right there if we weren’t in debt!

Again, it’s exactly the same as most people’s finances. The interest we pay each month has a real choke hold on our finances.

Four years to get out of the hole? That’s four years of not a single dollar onto paying down the debt. And that’s in an economic upturn cycle. So what happens when the next down cycle, or recession comes? Yup. We’re right back to borrowing, just to pay the bills.

The vicious cycle, for governments all over the world, and all of us, is totally backwards. Financially successful people SPEND during a bad economy and SAVE during the boom times. Think about that. They’re spending when everything is on sale and saving when earnings are up and inflation makes things more expensive.

Lastly, can we please stop comparing ourselves to broke countries? Well, we’re better off than this country or that. What nonsense. My neighbor might have one foot in bankruptcy court and that makes me financially successful? Give me a break!

And a final question to ponder: Who leads the way here? Should the government be the ones to balance their budget and live within their revenues, or should we lead by example and then hold the government accountable?

You Can’t Borrow Your Way to Prosperity…Honest!

This week, Finance Minister Flaherty announced that his department is done with the tweaking and tightening of lending regulations. Well, there’s only so much a government can do for our own good.

Mortgage refinancing is now capped at 85% and you can no longer get mortgage insurance on interest-only lines of credit secured by your home. Now, I guess, it’s up to us – as it has been all along.

While Statistics Canada just released figures that show our net worth is increasing to an average of $184,700 – our debts are climbing way faster. We now owe $1.55 trillion dollars, of which $45,000 is consumer debt, excluding mortgages.

News flash: You cannot borrow your way to prosperity. The majority of people have been trying that and we’re broke. How about trying to get to be debt-free, instead?

We freak out when gas is up 20 cents a litre. Really? 40 litres x 20 cents is eight bucks. THAT is a panic? We get a $500 repair bill and we don’t have the money and it’s an emergency and big stress? Is that how we want live our financial life? When will you get to the ENOUGH scream in your head and choose not to want to live like this anymore?

How sad that we aren’t learning the lesson from the U.S. Their debt levels are dropping like a stone. Last year, they paid down massive averages on their credit cards. In Canada, the average credit card balance dropped $25 from last year, according to TransUnion. Americans are also refinancing in large numbers to get OUT of variable rate mortgages and into fixed ones. And tons are bringing cash to the refinancing, in to pay down their balances. In Canada, we keep taking larger and larger mortgages.

More than half of us now have lines of credit, almost all of which are on a variable interest rate. Rates are heading up – they have nowhere to go but up. So the banks have us exactly where they want us. Owing BIG balances on our lines of credit that we can’t just pay off in a month or two, and rates go up. That’s how banks maximize their profits and how we go broke in a hurry.

Denial IS a financial strategy. It’s just one that won’t work very long. I heard a new radio ad yesterday: Debt problems aren’t about overspending – they’re about emergencies. WHAT? No! Are you nuts? Debt problems are exactly about overspending. If you live on less than you earn, you have money left over.

There is another ad that has a lady saying that so and so credit helped her pay off all her debts. What? They handed you free money? Like $10 or $20,000? NO! You consolidated – you didn’t pay off a dime! And you took a bunch of short-term debt and stretched it to two decades or more. Plus, the majority of people who do that have their credit cards and lines of credit run up again in less than 24 months. It’s not a solution. It’s making the problem worse!

Almost two-thirds of families live paycheque to paycheque. You have to know where you money is going and get in control. You think you know, but you don’t – honest. Spend 15 minutes doing a written budget. Off that, I guarantee most people can find $200 or so in savings right there.

Get yourself a separate savings account and work on saving one week of your net income. That will put you ahead of 65% of people. Thirdly, list your debts smallest balance to largest and start attacking the smallest balance with every dollar you can find and just make minimum payments on all the rest. When that’s paid off, focus only on the next smallest, and so on. There’s a whole section in the It’s Your Money book that’ll walk you through it.

More Often Than Not, Being Broke Is Our Choice

A survey weeks ago by the Canadian Payroll Association found that around 60% of us live paycheque to paycheque. While their president stated he was very surprised that people were so close to the line, we shouldn’t be surprised at all. In fact, I believe the figure is actually higher!

Being poor and broke is most often a choice. We create our own mess, the mess doesn’t just happen to us. No, not consciously, but in the financial decisions we make, the debts we take on, and our priorities with money. I know that if I spill a cup of coffee, right now, this minute, I’m going to clean up the mess. That’s a cup of coffee – why don’t we take that same attitude towards our finances?

To change it around, we can spend less, or earn more. Either one works, both together change our financial situation that much faster. If we wanted to, by next week, we can make around $1,000 extra each month delivering pizza, the newspaper, or a bunch of other part time jobs. If we wanted to…

If we wanted to, we can sell our car with the big payments by next week, and drive a $2,000 beater until we’re debt free. Just not having that car payment is a huge amount of money that could go to paying off other bills. If we wanted to…

People don’t move until they’re fed up and mad with their financial situation. When we no longer want to live in the state we’re in, you’d be amazed how quickly we can change it around. But until then, we keep confusing our needs with wants, and just give our money to everybody but ourselves.

We’re like an ATM – two paycheques go in, and all the money quickly goes out to make every payment in the world, and we just hope that we’re not out of money before we’re at another payday. Everybody has their hand out for our money and we give it to them voluntarily, and then complain that we’re broke. That’s not a life – that’s surviving, and it’s not a fun way to go through life!

At some point, all the stuff we’re still paying for isn’t worth the financial pain we’ve taken on. At some point, hopefully soon, it has to become an issue of the heck with the cheeses, I just want out of the trap!

In relationships fights over money is one of the #1 issues with couples. It’s the biggest cause of divorces, and a huge contributor to male suicides. We hear this, we experience the fights, and we STILL keep doing what we’re doing? Does that make sense at all?

People know how to get wealthy and know how to avoid making their financial situation worse. But why don’t we take the steps to make it happen? The bottom line is whether we’re prepared to do what it takes to turn it around? If so, it starts with some easy steps that very few people take:

Sit down without the TV and the kids and do a written budget with your partner. Every dollar is planned, and nothing gets spent over and above the budget. It’ll really clearly show you where all your money is going. If the budget is $600 for groceries, $300 cash goes into an envelope or a jar for the coming two weeks. When that money is gone – you’re done spending.

Step two is to get an emergency fund of one week’s gross pay into a separate savings account. Stop being naïve – there will be an emergency. This small rainy day fund is critical. It will rain – you know that!

Step three is to focus on paying off your debts. No RRSP savings, no investments, no vacations, and you’re not seeing the inside of a restaurant unless you work there. But rather a 100% focus on getting debt free except the mortgage. The It’s Your Money book has an easy to understand section that has you list your bills smallest to largest, then every dollar goes to the smallest debt until it’s paid off. Then it rolls to the next one, and so on.

There was a survey done of the richest people in the world from the Fortune 400 list. Seven out of ten started with nothing. Their wealth was built entirely on their own, without inheritances. When they were asked what the number one key was to building wealth, the answer was always: Get out of debt and stay out of debt.

It might seem cruel, but if were to be honest with ourselves, would we agree with this line from Larry Winget’s book jacket: People want what they’ve got. It’s a simple formula: You have what you want because your actions produced your results.

Can you get out of the life of living payday to payday? You bet. Do you want to? I’m guessing we all do. Will you do what it takes to make it happen? Ah – that’s where 90% of people choose not to…

Is There A Problem Here?

Last week, the Royal Bank released their annual survey of Canadians’ spending and savings habits. Now, any survey gets huge media coverage. In most of the major newspapers across the country it was a full five column story whereas I can’t get one column talking about the insights into credit and debt. But more complaining in a minute.

The survey shows that our savings are dropping and our debt is growing. Yes, it’s all backwards. 83% of us worry that we don’t have enough savings and even more than that say they can’t save as much as they would like. Less than half of us have any emergency savings and under 25% have three month’s worth of savings – and that has to be a minimum rainy day fund! Here’s what I’ve been saying for years and now there’s an actual stat: 67% of us think of our credit cards and line of credit as our emergency fund!

Now onto the whining part: Is it just me or is there some huge conflict here? The survey by Ipsos Reid was sponsored by a bank. Banks are in the business of lending money. That is where they make a profit. When we borrow and go broke – they get rich. When we save money – they pay US interest and on their financial statements, that’s a bad thing!

So am I right to be suspicious that banks are preaching savings while all their ads focus on selling their credit cards and debt? Their Sr. VP of Banking was quoted all over the story that us Canadians should save more, rely less on credit and be ready for financial emergencies. You bet, it’s totally right. But does that mean he will change the whole focus of the bank away from debt and onto marketing savings, lowering service charges and expense ratios on their mutual funds, make GIC easier to obtain and stop charging service charges on savings accounts? I’m thinking not! For me, actions always speak louder than words.

If I’m too harsh or out to lunch – I’m two clicks away from sending me a note, because my purpose and passion is not to be right but to make you think!