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Three Stories With More Questions than Answers…

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Today, I’ve got three stories that make me ask more questions than I have answers:

Electronically Traded Funds, called ETFs, are modern day mutual funds that you can purchase for a tiny commission and fee. Right now, there is more money invested in Gold ETFs than there is in the entire S&P 500. And that consists of the 500 largest companies. Just think about that. The fever is at an all-time high when there is more invested in something shiny and speculative than there is in the assets of the largest companies in the world. Although invested isn’t the word I’d use. I’d call it gambling. True or false? It may go up for another long stretch, but mark my words, when it corrects, it’ll drop by half in a hurry.

The State of California just approved an insurance company test which charges your insurance premiums based on the miles you drive. What do you think? Is that something that’ll benefit people or hurt them? I guess if you’re a Senior, it could be a good deal, but if you drive a fair bit….not so much….

Bank of America has just announced they’ll now charge $5 a month for their clients to use a debit card.

With the recently implemented financial reforms, banks have had their massive debit card fees capped. The Federal Reserve, and this would be the same in Canada, says it costs the banks 4 cents to process a debit card transactions. But until recently, their fees were averaging 44 cents. That’s a 1,000% return – a pretty good profit! It’s now 25 cents, and that helps merchants, and eventually you and me in lower prices, but cost the banks a ton of money.

Would you pay a fee just to have and use your debit card? I bet 99% of people will when it does come to Canada. Besides, if you go back to a credit card, the banks make even more money. So heads you lose, tails they win. Sick – but true.

Saving Money on Gas – Sort of…

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Sometimes we really do trip over a nickel to pick up a penny. We think we’re saving money, or interest, but we don’t always stop and do some easy math first.

Last week, someone shared with me that they’re really happy they finally purchased a much more fuel efficient car. They paid around $15,000 for a new car that now gets way better gas mileage. Well – not so fast. The logic makes sense when gas is around $1.20 a litre, but does the math make sense? Is this family really going to save some big bucks?

Let’s look three years out. In three years, this new vehicle will have depreciated to around $9,000. That’s a loss of $6,000 right off the top, based on averages from Consumer Report and Edmunds.com. But what about the fuel savings?

Someone driving an average of 20,000 km a year going from 15 mpg (15.7 l/100 km) to 30 mpg (7.8 l/100 km) should save some big bucks, right? At 30 mpg, driving 20,000 km a year, it’ll be $5616 in the gas tank over three years (1560 l x 3 years x $1.20).

That old car at 15 mpg will cost $11,300 in gas (3140 l x 3 years x $1.20). The saving is $5,688. That doesn’t equal the depreciation of the new car! Yes, the new one is under warranty, yes, that family may keep the new one for a lot longer than three years. But make sure that you’re making an informed decision with five minutes of easy math.

In this case, my friends’ feedback was that he wouldn’t have done it – if he’d have known. He did pay cash, because this math doesn’t include any interest over the three years, if the car is financed. That would add another $1,100 to the cost of ownership. My suggestion would have been to buy a $5,000 to $8,000 used vehicle with the good gas mileage. An older vehicle has pretty much depreciated out, so the savings in the tank are real, almost from the start.

The Real Profit on Selling Your Home

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Last week we talked about the option of drawing money out of your RRSP to buy a home. Today, I wanted to talk about the other side, about someone selling their home. This example comes from a short story out of Moneysense magazine, and it’s really insightful.

Here’s a math quiz: If you bought your home for $250,000 and sold it for $450,000 ten years later, how much did you make? Almost all of us would say it turned into a $200,000 profit. Well – no, not even close. The example assumes a 5% mortgage with a 10% down payment on the purchase. Here’s what’s missing from the equation, in rounded numbers:

-you have to subtract the original down payment money of $25,000
-take off the $4,000 legal fees for the purchase and sale
-deduct the mortgage interest for 10 years of $160,000
-take off the $2,200 land transfer tax at the time of purchase
-less an estimated $19,000 spent on home maintenance
-there’s about $22,000 of realtor fees from the sale
-and deduct the $168,000 still owing on the mortgage

That leaves an actual profit of just under $18,000. Quite different than thinking you’ve made $200,000. Keep in mind you did have a place to live for a decade, but the real net profit is quite different than the sale proceeds.

Money & Dating Plus First Time Home Buyer Plans

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Spending and Dating

OK, since I’m single I have to keep up on these kinds of surveys. This one is from match.com and surveyed a ton of singles on their opinions on spending and dating. It turns out that men and women have very different expectations:

Men are three times more likely to consider the cost of a date.
On the other hand, 58% of women prefer a casual date, and not one that involves spending a lot of money.
While I’m guessing it’s not a big consideration for men, 53% of women do spend money before the date on things such as a new outfit, manicure, or stylist. I hope the date is worth that money! Or maybe it shouldn’t be called spending – maybe it should be called an investment…

For both sexes, 82% of respondents say their interest in the other person increases if they see an act of financial generosity. That could be many things ranging from a larger tip, or some kind of charitable giving.

On the downside, three-quarters of both sexes are turned off if they find out that their date has more than $5,000 of credit card debt.

First time home buyers:

With the requirement of a 5% down payment, and pretty high average home prices, it keeps getting harder and harder for someone to get into their first home.

I read some interesting stats the other day on using the RRSP Home Buyers’ Plan: Since inception in 1992, almost 2.5 million people have taken advantage of the program, with an average withdrawal from their RRSP of just under $11,000. In total, over $26 billion has been withdrawn from the program.

Over the past five years, the numbers and average withdrawal have both decreased. It may be a good idea to sort of borrow from yourself, but you have to remember that it’s money that is now NOT growing in your RRSP for retirement and you DO have to pay it back over the next 15 years. If you don’t, one-fifteenth of the total is added to your income that year, and you’ll be paying taxes on it. You also need to remember that this payback in on top of your new mortgage payment, utilities, property taxes, etc. Those are all likely to be a much larger part of your income now.

Who cares? Well, most of us do – or should. Almost 70% of Canadians own their own home – well, have a lender who lets them live in the home. And almost 40% of our entire wealth is tied up in the equity of our homes.

If the US government were a family:

Here is an interesting way of taking the staggering U.S. debt of over $14 trillion and breaking it down to figures we can understand:

This family would earn $58,000 a year, and spend $75,000, and have $327,000 in credit card debt. The proposing so-called “huge” spending cuts would cut expenses from $75,000 to $72,000 a year.

You’re Going to Get Ripped Off

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Recently, a new wave of ads for debt settlement companies has started. I can’t call them a scam, because they’re perfectly legal. But I can tell you that you’ll get ripped off. That’s the quote from the Clark Howard show which reaches millions of people.

First, here is some of the content from their commercials:
-Our attorneys will work with your lenders to settle your debts for up to 70% less.
-Within 10 minutes, an expert will be able to determine if you’re eligible. What do you have to lose but your debt? Call us.

Well, not so fast. Before you make the call, you have to understand the background, and what will happen:

The ad, of course, is targeting people who are in over their head in debts and who would love to believe that their solution is just a phone call away. They’re praying on the desperation of people in real serious financial trouble. At that point, they’re prepared to try anything to get some help out – from anyone.

As the ad says: What have you got to lose? Our experts will determine inside of 10 minutes if you’re eligible. Oh and you will be eligible. Because it’ll make someone believe that three quarters of their debt will get wiped out.

On the call, the first few minutes will be getting your name and contact information so they can keep calling you. Then they’ll get a list of your debt. What they’re looking for is the amount of unsecured debt. That is, debt without collateral such as you house, line of credit against your home, or your car. Unsecured debts are things like smaller credit lines, and 90% of it is your credit card debt.

Based on the total unsecured debt, they’ll then advise you that you’re eligible and that they’ll work with your creditors to get this total amount settled. But one more thing you need to do first: You’ll need to pay them a fee, up front, of somewhere between $1,000 and $3,000 depending on your total debt. That may sound outrageous, but you’d be amazed how many broke and desperate people will find a way to pay that fee for the hope of getting a huge reduction in their debt.

Once the fee is paid, they should start to get to work contacting your creditors. But first, you have to work. They’ll advise you that you now need to stop paying all these bills. It’ll soften up the creditors and then they’ll be able to arrange a settlement when the debt is old and unpaid for three months.

Yes, that’s the extent of their work. Get your money up front and tell you to stop paying. That advice I can give you for free right now. When lenders haven’t been paid for two months or so, they’ll repossess your vehicle, or start foreclosure on your home. Unsecured lenders don’t have collateral. At 90 days, and then again at 180 days behind, they have a big problem. But they’re much more likely to sue you, or pursue some pretty strong collections, as they are to settle with you.

At the end of the day, you’re out some huge up-front fees and your credit is destroyed for seven years. You’ve then got no chance of re-financing, consolidating, or even getting a lot of jobs that run your credit report. You’re right back where you started, but three months behind, the stress gets much more intense with these arrears, and you’ve added more debt to pay their fee. Don’t do it. Don’t make the call. They ask what you’ve got to lose? I’ve just described some of it.

Lending Money to Friends and Relatives

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There’s a reason the subject of lending money to friends and relatives has a big section in the It’s Your Money book. Rough rule of thumb: Don’t do it.

Recently, I had some e mails back and forth with someone who was talking about their credit card balance. One of the first sentences in the note was: I know you hate lending money to family. That was followed by explaining it was the reason their credit card bill was up there. Now, I’m guessing that this wasn’t about a hundred bucks or so – because that’s totally different than a more significant amount.

I don’t actually hate lending money to relatives or friends – and that applies just as much to borrowing it, as lending money. What I hate, and what should never happen, is that broke people shouldn’t lend money to other broke people!

If you can’t take care of your own finances, how can you help others? If you don’t have the money, how on earth can you justify lending it to someone else? THAT was the problem with this person, and THAT is what shouldn’t happen.

Anyone who is financially successful can, and should, use some of their money to help others. Whether it’s tithing, donations to charity, and even helping someone directly who needs the helping hand. If that applies to you, it’s a Christian thing to do, or at least it’ll also make you feel great to know you’ve made a small difference. But it should be done with actual money, and not by someone getting themselves further into debt by borrowing more money.

For the rest of us, we can’t afford to do it – we don’t have the money! Stop thinking of the room left on your credit line, or your credit card as actual real money. Focus on what you owe, and not on what you can still borrow!

It’s perfectly OK to say no and ask if there’s anything else you can help with. It’s also a great idea to go down to Mosaic and spend the $20 buying them a copy of the It’s Your Money book so they can get the tools on borrowing smarter – or better yet – getting out of debt.

Giving someone one car payment doesn’t solve the underlying issue that they likely can’t afford the car – and will just have the same problem next month. Lending someone the money for the rent often just delays the problem for another 30 days. Even worse, is helping someone to pay their credit card or other bill payments. They’re spending money they don’t have. They need to face it to replace it. Stepping in as a temporary stop gap doesn’t get them any closer to their financial reality check.

Yes, I’m being kind of mean. I don’t mean to be, and if you get out of the emotional reasons, you probably know I’m right. If not, I’m OK to get your hate mail, although there certainly are legitimate times for you to step in and to help.

Two more quick points:
This advice applies just as much to co-signing a loan for someone, as lending them money. In fact, more so, because you’re now fully liable for the entire term of the loan. It’s also a really quick way to destroy your credit rating.

Finally, if you do lend someone the money, you have to think of it as a gift and not a loan. If you don’t, it WILL cause problems down the road. The person will start to avoid you, no matter how nice you are about the subject. You may get resentful of how they used the money, or with family, dinners together will never taste the same with the loan balance still hanging over everyone’s head. All of those do more harm than thinking you’re doing something good in the first place.

Business Finance, Identity Theft and More Sad US Housing Info

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How ready is your business for an emergency?

We’ve talked in the past about the fact that almost two-thirds of people couldn’t afford to miss one weeks’ worth of pay. But there are also businesses who rely on customers and cash flow in the same way.

In the event of a disaster, 40% of businesses don’t re-open their doors. That’s a staggering failure rate for a small business. And disasters do happen – and come in very different forms. While you and I have an emergency fund, for a business, it’s called retained earnings. This is the profit of a company which STAY in the business, and lots of companies have very little of that.

Knowing this is a huge problem for small businesses, the Red Cross has teamed up with the U.S. Government and set up a great site. This web site has an easy check list to think through, and enact, some easy steps to prevent your business from being one of the 40% who fail. That check list is a lot more than having money in the bank, or the right type of insurance. It’s at http://www.ready.gov/business/

Going from bad to worse:

If you’re wondering about the US economic situation, houses and their values are one of the major factors, along with their stalled unemployment rate around nine percent.

On one of my flights this week I read a story in the Orlando Sentinel about the Florida housing market. They did a study in their four biggest counties in Orlando that turned out to be pretty depressing.

Right now there are 150,000 vacant homes in those four counties. That’s not including second homes or any vacation homes, those are just normally owner-occupied homes.
That means, with an average of 2.2 people in a family, over 330,000 people would need to move into the area to absorb those homes which are sitting empty right now. And that’s assuming they don’t build a single new residence. THAT is an over-supply. And when there are too many of anything, how do you sell it? Economics 101 says the price will need to drop. Orlando is nice, but they aren’t going to have 330,000 people move there over our lifetime…

Moody’s Analytics estimates that in some areas such as Naples, Florida, home prices won’t fully recover until 2038.

One of the nastiest identity theft problems

I’m not sure to what extent this is a problem in Canada, but you have to know it’s here, or coming: The US tax department, the IRA, has a big identity theft problem. Crooks who have stolen someone’s identity are using it to file fraudulent tax returns on-line. They change the address, put in a bunch of phony deductions, and then claim and get a big tax refund.

When the real person files his or her return, it bounces, of course, because their return is already shown as processed and refunded in the system. To fix that, and to challenge this fraud takes a huge effort, a lot of time, and is really tough to fix. With crooks selling someone’s full identity for less than $20, look for some tougher steps to file your return on-line next year. You have to know the Canada Revenue Agency is aware of it and taking similar steps before it becomes an epidemic.

Broke and Broker

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Wow! We’re number one!! Add something else to the list of what we are beating the Americans at. Except this one isn’t worth the win.

What’s the so-called win? We just hit a debt-to-income ratio record of 150%. That means for every $100 we earn, we have $150 of debt. NOT something to be proud of.

Compare that to the U.S. where they maxed out their debt to income ratio at 136%. But what’s even more impressive is that Americans have paid their debts down by more than 20% in the last three years! Their debt-to-income ratio is now at 114% and dropping! Sure, it’s partly due to foreclosures and bankruptcies. But give Americans credit…pardon the pun. They found themselves in a deep recession and stopped spending and started paying down their debts in a big way.

You have to remember that there’s always a direct connection between savings and debt. We really can’t do both. The higher our debts, the larger our monthly payments, the less money we have to save. Plus, when rates start to jump again in the next few months, any debt that’s not on a fixed rate is going to become a whole lot more expensive to service each month.

Fortunately, our federal debt is a distant second to the U.S. As a nation, we owe a whole lot less than they do. If you’ve watched any cable TV station, you know that the U.S. Congress is in a prolonged fight over the debt ceiling. With their constitution, the maximum borrowing and debt has to be approved by Congress who controls the money. With a Republican controlled House of Representative, and a Democratic President, it’s been a slow-moving train wreck that has to be dealt with by August 2nd,or the U.S. is officially in deep trouble.

The debt ceiling is 14.3 trillion and they’ve reached it. Right now, their annual revenue from 2010 was 2.16 trillion, but 3.45 trillion in expenses. One of the funniest things, OK it’s not that funny, is to hear lots of politicians claim that it’s not a problem, and that there’s plenty of money to pay their debts.

OK, this is too stupid, even for a fifth grader: two trillion income, three trillion expenses and having to pay 14 trillion of debt. If your family spends 40% more than you make, can you still tell your partner that there’s plenty of income to pay all the bills? There is NOT enough money – hello? The fight over reducing spending and/or increasing some taxes, or closing loopholes, is going to go on for at least another week.

Why do we care? Well, the implications, or even the thought, that the U.S. government won’t pay their interest payments on their debt is pretty scary. We’re their largest trading partner, and we’re neighbors. If, or when, bond holders and the international finance community demands higher interest rates because of the risk, it’ll impact us as well. Remember, what happens in the U.S. happens here – sooner or later. Stay tuned and maybe the adults in the room will find a solution, and not just a temporary fix.