Author Archives: admin

Is Your Car Making You Money Or Killing Your Financial Freedom?

Leave a reply

Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 300,000 km on it. Ouch is right – but once the shock wore off and I wrote the cheque, I was actually quite happy about it. Let me explain:

I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I’ve spent $2,500 on repairs and the car’s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today’s $3,000 value, the car has cost me $9,500, or $113 a month.

One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she’s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.

Compared to her $38,000 versus my $9,500 spent, I’m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I’d rather have the $28,000 in savings.

Another friend takes some of what I’ve been teaching and won’t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it’s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.

Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I’m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I’d rather have the money.

And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it’s gonna cost you a lot of money. After all, there isn’t a car around that’s worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you’ll never ever recover?

Oh, and two more things: The GM and Chrysler merger appears to be off the rails this week. I don’t see how two on-the-edge companies in big financial trouble will make one strong company anyway, but get ready for massive layoffs – merger or not. It doesn’t take a finance degree to see that GM can’t keep losing over $1 billion a month.

The holdup right now is U.S. government approval and support. (Make that, more bailout money in addition to the $25 billion the auto industry received from Congress.) There’s also the issue of the $7 billion loans Cerberus has for buying Chrysler from Daimler last year. You see, the banks, including JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley have been selling off large pieces of their loans to raise cash. But it’s next to impossible to get all these pieces back together as now there’s dozens and dozens of lenders who have a piece of this. It’ll make it likely Cerberus will have to pay off this total and start with new loans that are easier to trace – but now much harder to obtain….stay tuned!

And with GM only having enough cash for this quarter, you can bet there’ll be another wave of bailout money. Will it solve much of anything? No, sorry. A bailout changes nothing structurally. It only helps the companies to tread water a while longer. It’s kind of like making your minimum payments for a while. When the money runs out, nothing has really changed.

If You Use Your Credit Card At a Tire Shop Should That Reduce Your Credit Score?

Leave a reply

If you visit a marriage counselor, should that affect your credit score? OK, how about a massage parlor charge on your credit card? According to a lawsuit by the Federal Trade Commission (FTC) against credit card issuer CompuCredit – it happens.

Every lender uses a credit score, but even for the widely used FICO score, nobody fully knows what goes into calculations of the formula.

Others use internal proprietary models, and the FTC lawsuit against CompuCredit alleges “deceptive” marketing practice and provides a great (or ugly) insight into the secret business of credit scoring.

In this case, it is about their Aspire Visa cards for subprime borrowers. What the FTC alleges in the suit is that the company didn’t disclose that they closely monitor spending patters and reduce credit lines if cards are used at certain places that trigger a “problem.” Some of them allegedly include tire shops, massage parlors, bars and marriage counselors.

Yes, all card issuers look at your spending patters, amounts, and the places you spend money on your credit card. But the concern is that they may affect your credit in biased or unfair ways as a result. It’s CompuCredit’s second lawsuit, the first was in New York, and was settled for $11 million over its marketing and billing procedures.

Credit card issuers have been quietly reducing credit card limits in any event, mostly without ever notifying customers in advance. With some card issuers running 10% arrears, small wonder. And somehow they’re surprised delinquency is skyrocketing when they were handing out credit cards like candy?

The majority of limit reductions appear to be in geographical areas hardest hit by the housing troubles, including Florida, California, Arizona and Nevada. It is another important reason never ever to have all your financial eggs in one basket – with one card issuer. A lower limit reduces your available credit – the percentage you owe vs. your total available limits and that’s around one-third of your credit score.

Card issuers are pretty jumpy these days and want to prevent losses down the road, rather than just writing off more and more balances reactively. According to the Wall Street Journal, American Express appears to have a new software program that may kick in to reduce limits should cardholders use their credit card at Wal Mart or Marshalls, for example.

It’s only a guess, but it appears that Amex believes charges at these two stores, for example, may predict problems down the road. Is the company thinking their card holders may be in trouble shopping at the “lower-end” stores, or is it a drastic overreaction and incorrect predictor? Time will tell, but I’ve used my Amex card at Wal Mart for decades. It isn’t about financial trouble, for me it’s about avoiding it, by not getting overcharged at other retailers.

News from the US

Leave a reply

Late last year we talked about the coming opportunities of buying real estate in the U.S. At that time, it seemed reasonable to be talking the fall of this year.

But you can forget that. The mortgage problems aren’t anywhere near an end and right now the problems are feeding on themselves and making things worse and not better.

There are a ton of foreclosures, averaging around 7,000 A DAY, and that’s bad enough by itself. But what’s happening now is that people who have been paying all the way along are becoming hard-pressed and discouraged.

They’ve seen foreclosures all around them but have been paying on a home that’ worth nowhere near what they owe. Ballpark? $50 to $100,000 or more in the hole. So many of those are now mailing back their keys and giving up. Banks call it jingle-mails as the keys are mailed back to them.

Others, and in growing numbers, are looking down the street at a foreclosure. That house, same street, so probably very similar in size, etc. is now $100,000 or so less than they owe! So many people are now buying that foreclosed home, setting up the mortgage and then sending back the keys to their home. Yes, this buying and bailing as it’s called, wrecks their credit rating, but they’ve first bought another home on the same block.

It’s not right, it’s not moral, but it’s happening in ever increasing numbers while Congress keeps coming up with bailout plans, the vast majority of which are designed to help lenders and not homeowners.

It doesn’t help that mortgage lenders are totally overwhelmed and often don’t even return calls, never mind helping homeowners restructure their loans and the whole process keeps feeding on itself: Foreclosures get dumped on the market at any price, more people are forced to re-finance at higher rates they can’t afford, seeing their home dropping more and more in value as foreclosures surround them, giving up on their payments, which puts even more houses into foreclosure.

Oh, and a recent survey reports that about half of all foreclosures have significant damage such as ruined floors, carpets, holes punched into walls and missing appliances, all of which reduce the home values by about another 25%, according to the survey.

In Miami, the home inventory is about three years, based on normal sales volume – and what on earth is “normal” these days. And even in Arizona, it’s more than a years’ worth of surplus inventory.

So hurry up and wait…maybe next fall if you’re thinking of buying down there.

Black Monday: Why You Should Learn the Lessons

Leave a reply

Last week we talked about the nightmare of the bankruptcy of Lehman Brothers, the sale, or give away of Merrill, and the $85 billion loan injection into insurance giant AIG.

There are some big lessons for all of us individuals, as well. Sure, our first thought is about our mutual funds and RRSPs. But how many of us live on credit and are buried in payments of one kind or another?

As long as our income keeps coming in, we’re fine. But what happens when we have to do without a paycheque for two months? That’s the same as cash-flow problems for companies.

What are the odds of doing well, over the long term, if we use borrowed money to do our investing? Now, it’s fine to get a one-year RRSP loan, that’s different. But how many e mails do you want from people who look a line of credit to buy gold at around $1,000 an ounce and it’s now around $800? How many examples would you like of second mortgages to buy tech stocks in the 90s because they were never going to go down and people didn’t want to get left out? It is not investing – that is gambling, pure and simple. When someone jumps out of a 50-storey building, for 49 floors they can convince themselves they can fly. But then reality re-appears in a hurry when they hit bottom.

It’s called leverage and it’s a very dangerous shell game. One of the bankrupt firms was leveraged 33 to 1. That is: for ever dollar of assets, they borrowed $33. When shares, or in their case, these mortgage portfolios they invested in, were going up they were making a ton of money. But with a 33 to 1 ratio if investments drop three percent – that’s all – three percent – their entire assets are wiped out.

When you invest with cash – that’s the most you can lose. When it’s on margin, through leverage, you can be wiped out AND still owe a ton of money after all your cash investment is gone!

The good news? These days the rich will absolutely get richer! Why? There are a bunch of companies who have been around for decades whose stock is trashed for no reason. They have great dividends and their shares just got sucked down with the whole market.

Could you have been one of the rich people? You bet. If you’d have the cash to put into savings instead of paying the credit card, the mortgage, line of credit or the car payments.

Is Credit A Good Tool?

Leave a reply

Last week we talked about the personal lessons about credit and debt that are there for all of us to learn from but I also got yelled at.

I was doing a phone in show and a caller told me I was crazy: That credit is a great tool to get rich. His point was if you just get a number of lines of credit from different banks you can buy a home and flip it right away without ever having to put up any money.

Sorry, credit won’t help you get rich. It’ll help you go broke. And ironically, the day after, Alan Greenspan, the former Chairman of the Federal Reserve was quoted as saying that no country can become wealthy through credit.

Merrill Lynch tried that: They were leveraged 33 to 1. That is, for every dollar in assets, they borrowed $33. On the way up, that’s a 33% return when it should have been a 1% return using cash. But on the way down, anything drops by just 3% and their entire assets are (and were) wiped out.

We won’t get it as bad as the U.S., but right now in Vancouver it takes a $700,000 income to service an average priced $900,000 house. That’s not affordable for 95% of people! Something has to give or there just won’t be any more buyers! And that’s an average house!

At some point, incomes have to come way up or prices way down. It’s the same thing as happened in the U.S. and right now, Vancouver condo listings now up 100% and sales down 50% for just that reason. Want to take a guess as to how many people in Vancouver, who bought in the last few years have almost no money down and a 40-year mortgage?

Credit is buying something you cannot afford to pay for. Simple as that. It doesn’t make all credit bad but it’s really great to be a little bit pessimistic when it come to financing anything. A “what if” attitude is a real positive to consider BEFORE financing anything – because afterwards it’s too late – as millions of Americans are now painfully aware of.

What The Heck Happened On Wall Street This Week?

Leave a reply

In the months to come it’s likely this past Monday will be called Black Monday on Wall Street. Where do I start with the big three stories of the day.

But first things first: I wish I had five more minutes to give you a brief history of how we got here, because it affects us Canadians in huge numbers of ways.

Suffice it to say that in Canada, banks hold mortgages on their own books and keep them in-house. In the U.S. they’re packaged and sold in blocks called Collateralized Debt Obligations, or CDOs. They’re all pieces of thousands of mortgages, good stuff, bad loans, subprime and kinky ones all put through a blender and packed nice and neat. Everybody wanted them and nobody could get enough on their books for years.

The huge investment firms were making billions in fees gathering them, packaging them and re-selling these CDOs. It turns out that they started to fall in love with the product they were selling. First, they put a ton into their own accounts, because it was a great return. When things slowly started going sour and they didn’t want to admit it and to keep making the market think everything was just fine, they got stuck with billons more they couldn’t sell.

Now back to Monday: First was the huge and well established investment firm Lehman Brothers filing for bankruptcy. They were done in, or finally dragged under, by over $60 billion of bad mortgage loans on their portfolio. And, gee – their CEO got $22 million in pay just this past year. Nice money for guiding his company into bankruptcy…

Then came the announced sale of Merrill Lynch to Bank of America. Same story in a way, since Bank of America is buying the firm in an all-stock deal. That’s kind of like me buying your house for no cash, but only paying off your credit card bills.

Lastly was the insurance giant AIG filing for re-organization. It’s not that the insurance business is bad. It’s just that AIG invested their clients’ premiums in mortgage loan portfolios, instead of GICs, because they were getting a better return. Lesson number 780 for all of us: If you want a higher return you have to take a higher risk!

And a month ago, we were told that the worst was behind us. Yea, right. Banks and investment firms are the oxygen of the economy and this isn’t helping.

Added to the Monday list is the government takeover of Fannie Mae and Freddie Mac last week who hold over $5 TRILLION of mortgage loans. There isn’t really a Canadian equivalent unless you kind of think of CMHC holding half of all Canadian mortgages on their books!

Until home values stabilize we can keep using the quote from Lily Tomlin: Things are going to get a lot worse before they get worse.

When you run out of money you run out of peace of mind

Leave a reply

Less than 45% of us have any kind of savings for retirement. The simple reason is that we don’t pay ourselves first. We pay ourselves last – but since there’s no money left over right now, last means…well never. To start saving, most of us need to make some payments go away first in order to free up some money.

When our debt and payments start getting carried away, we can do one of three things: We can stay in denial and continue our optimism that it will somehow take care of itself.

We can get frustrated, depressed and throw our hands up, or we can have the courage and discipline to view these payments and debts in realistic terms and make simple and fundamental changes to turn things around.
Yes, it takes courage and discipline – nothing is easy, but it’s well worth it. After all, those who understand interest want to collect it. Those who don’t are the ones paying it.

An easy place to start is in the debt chapter of the It’s Your Money book on the step-up debt payments. It walks you through a simple example of $25,000 of debts and pays it off in less than one-quarter of the time with just $100 more each month.

Even if becoming payment free seems impossible, two easy things are to take your smallest monthly payment and do whatever it takes to pay it off. That alone frees up a bunch of money.

The second one is to cut $200 of your expenses each month. If you make it a game and not a pain and honestly look at every dollar going out the door you’ll easily do it.

We may not want to face it today, but at some point we have to change from a consumer mindset to a savings mindset. At that point it shouldn’t take a decade just to get back to zero in paying off your bills.

To have some different results, we have to do some different things. We have to make some better choices which are not based on old patterns, fixed beliefs or previous habits.

Because you and I have experienced it: When you run out of money, you run out of peace of mind.

Learning the Painful Lessons of Others

Leave a reply

I had a great phone call last week from a radio listener. After we talked, I realized there were a bunch of things in the call that are huge lessons for all of us:

The caller shared that she and her husband were two years away from paying off their mortgage. As I was heading for the fridge to pull out some champagne, she volunteered that they also had a $100,000 line of credit.

Stop! What? OK, let’s not kid each other here. That means they’re a long way from a mortgage burning party. The line of credit is secured against their home – it counts! Kind of like saying we’re debt free except that $8,000 Visa balance. Nice try…

This couple is also planning to retire in a few years. But that means no more paycheques and a big switch to a fixed income. What happens then? Most of us drop back to paying interest only on these horrible lines of credit and that means it’ll never be paid off!

Those circumstances describe a large number of people in a very similar situation, so let’s look at three points:
-First – combine the first mortgage almost done with the line of credit. TODAY! Credit lines are variable rate and change every month. The next rate waves are up up and away. Take the amount you’re paying on the two right now and put it into any on-line calculator. In this case, it’s about $120,000. Take a fixed rate less ¾ percent and plug in the current payment to get the term. In other words, don’t take a 10 year mortgage and drop the payments. Take the payment and make the term work.

-Make that payment as high as you can possibly afford and that should give you your retirement date. Because then you’ll be ahead of the game $1500 or $2000.

-Have the payment and term before going to your credit union or bank. Don’t let someone tell you, “well, you should add a cushion of $10,000” or “you should stretch the mortgage so you have some cushion.” Bullcrap – you’re being sold so get out or tell them to get real: on a longer term or more borrowing. That’s NOT what you want and you’re in control!

More and More Generation Y Continue to Live At Home

Leave a reply

A recent survey conducted by Decima Research asked non-homeowners under age 34 for some savings and home purchase feedback.

Just like paying off our debts, the survey shows a real disconnect between the reality of what’s happening and the dreams of what the respondents would like. Here’s what I mean:

The survey involved over 1,200 people aged 21 to 34 who had aspirations to purchase a home in the near future. Of those, nearly a third still live at home to save for a down-payment. But even in the 31 to 34 year group, 22% in Toronto and 17% in Calgary and Halifax, are still living with their parents.

The response was that they’d likely be purchasing a home in the next few years – yet they’d only been saving for a down-payment for an average of 1.6 years. And what are they saving? Less than 13% of their income – even though they’re still living at home.

The respondents said they’d likely save more than 15% for a down payment and that it’ll take less than four more years to save all that. However, this shows a real disconnect between what they’d like to do and what they’re actually doing, in real terms, to save a ton of money.

The savings aren’t happening, even when this age group has a real focused and tangible goal. In a US survey released last week, the pollsters asked 18 to 21 year olds whether they’d start a savings plan of some kind in 2007. Over 90% of them said yes – but when that’s compared to the survey the year before – less than 20% actually did.

It’s not just Generation Y, but don’t all of us have real trouble finding a way to save? Why? Because for this group, it’s likely impossible due to student loans and their credit cards. But for the rest of us, isn’t it also our current debts that are killing our dreams for the future?

Actions speak louder than words and just having good intentions doesn’t make anything happen. It takes a big goal, a strong desire, a specific financial plan and payroll deduction or the savings coming right out of our bank account. It’s called paying ourselves first. But for many of us, just paying down our debts much faster is also a way to generate huge savings. Savings in interest and lots of payments that we now won’t have to pay to make someone else rich.

The Power of Marketing

Leave a reply

This morning, I’m not making a shot at the mega-bank managers, but just want to look at their marketing department and advertisements.

Scotiabank says you’re richer than you think. Now THAT is something I like to hear. But I believe that kind of optimism leads us into debt and most people are actually poorer than they think with not enough retirement savings or even an emergency account. Now if they want to make me richer, how about a lower credit card rate and dropping some of those service charges and fees? And their ad on the ATM machines say: Get ahead with good borrowing choices. Now that’s a no-brainer oxymoron isn’t it? If I’m richer than I think, how come there are so many ads wanting me to borrow? Does that help me get richer?

The Royal has ads that say they have the answers to questions I’ll have next week. Oh really? One says: yes, Gerry in Georgtown, you can afford that variable rate mortgage. Hmm…you have no clue who I am, what I make or what my credit score is, but you’re telling me I’m approved AND that I should get a variable rate? That sounds exactly like what happened in the U.S with their mortgage mess, adjustable mortgages and everyone qualified, doesn’t it?

Posters all over the BMO branches promote shoulda, woulda, coulda with the line: you can, with a homeowner readiline. Should, could go into debt with a line of credit secured by their clients’ home? How about should save, could get out of debt and WOULD if they wouldn’t market debt so heavily!

The CIBC says deal with them “for what matters.” But what matters to you and me versus the bank is probably quite different. That’s their slogan and now they’re promoting getting a free fridge. Yes, if you move your mortgage to them AND get a line of credit – so up your home debt beyond just your mortgage they’ll give you a major appliance. I can assure you if I were to walk you through the math it’s NOT a free appliance, honest!
The TD has a cash-back mortgage. Sign a 7-year loan and they’ll give me 7% cash back. So I can walk out with $14,000 if I sign a 7-year mortgage for $200,000? If that sounds like free money you need to give your head a shake because it’s a much higher rate.

I’ll put the math on the web site under tip of the week, but the bottom line is that your payment on this cash-back mortgage will now be $201 higher and at the end of that seven years, your balance will also be over $5,000 higher. With some simple math, that $14,000 free money works out to paying just under 14% for it. Not exactly free because a line of credit would cost you about a third of that interest.

$200,000 mortgage on a 7-year fixed term:
Cash-back rate is 7.95 so the payment will be $1,520
Balance at the end of 7 years: $175,865
Special rate mortgage would be 6.33% at $1,319
With a balance at the end of $170,805
So it’s $201 more a month times 7 years times 12 months a year or $16,884 more
And the balance is higher by $5,060.

That makes it $5,060 higher balance + $16,884 more in payments for $21,994 to get the $14000 up front, translating to a 13.85% interest charge on that money.

But here’s the winner of the most stupid financing ad: It’s an investment firm that wants you to re-mortgage your home so you can invest with them. And their tag line in the ad: “Don’t let all your equity stagnate.” Stagnate? Sounds like three week old bananas or moldy bread. I thought equity was a good thing and the goal was to get the biggest equity in the world – that’s called a paid off home. Here’s some firm doing whatever they can to have to finance more and more.

THAT qualifies for the stupid award – hands down!