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A Homebuyer Heads-Up and An Online Travel Booking Alert

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When one of my relatives purchased his first home a month or so ago, we talked about some of the insights and tips that saved him just under $20,000. That story, and every story, is always on yourmoneybook.com. However, in addition to that, there are also some ways to assure your home doesn’t become a financial nightmare:

If you have a renter, you need to set aside the security deposit you received and three months of rent in a separate savings account. The deposit isn’t your money, so if you spend it, you could be in trouble when you have to return it.

As with any rental, there are times when you may not have a tenant. But you’ve gotten used to having the rental income. If the truth were know, you can’t do without it. So set the first three months aside. You can’t miss what you don’t have and now, if you are ever without a tenant, you have the money to draw on.

Set your taxes up on a monthly payment plan. Some jurisdictions charge a small fee, or it may be free. Whatever the case, the majority of people don’t have an extra $2,000 to $5,000 around each June. When it’s on a monthly payment plan, just like your mortgage payment, you’ll avoid a ton of debt and trouble that you know will come each year.

If you’re buying a home, trust me that you’ll have to have an extra $4,000 over and above your down payment. I can’t tell you how often that’s a huge shock to people and immediately goes on their credit card or line of credit. You’ll need the lawyer’s fee, appraisal, tax adjustment and house insurance. After that, you have to know there are some fix-ups you’ll need to do the first week – you may as well plan on it.

One more story: Be careful with online travel websites. You’d think that shopping online for hotels or airline tickets should give you a leg up on getting decent prices, but that’s not always the case.

Two really bad examples came to light recently: Delta airlines was recently caught quoting higher airfares for anyone who had logged in with their frequent flyer number, instead of just shopping anonymously. Their logic seemed to be that anyone who is a frequent flyer will be loyal and travel with them, even if the prices are not competitive and higher.

Even worse was the travel site Orbitz. IF you shopped for a hotel room using a Mac computer, you were getting higher priced hotel rooms than if you were using a windows program! They went oopps, and tried to explain that, well, people with a Mac have a higher average income, so they assumed they’d want to see more expensive hotel properties.

As with everything else we talk about – you have to be careful and you have to know what to do and to avoid!

Change Of Plans: Your Bank Wants To See You Again

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With new credit card legislation a couple of years ago, card issuers can’t increase your credit limit without your consent. Remember that their main goal is to have you owing the most amount of money and making the smallest payments. THAT is how they maximize their interest income.

These days, you’ll get a notice on your statement that you qualify for a limit increase – you just need to call. Or they’ll send you a separate mailer, and may even phone you from their call centre. Don’t do it – unless your limit is really low, it generally becomes more temptation.

The trend of getting you out of the bank and to the ATM machines is changing. Think about it: They can’t solicit or sell you very well if they can’t see you!

When I was at one of the big no-service banks last week, I overheard the teller next to me tell people: My screen just showed that you qualify for a limit increase on your card. Want me to go ahead and put that through? Is that clever or what? And in the few minutes I was there, this teller was three for three. She converted all three people she asked to a higher limit. Great for the bank…often not so great for the person thinking they’re being flattered. Scotiabank does it through their ATM machines. If you’re up to bat, they’ll have a screen that advises you that you qualify for a Visa limit increase and just click here. However, it’s not as effective as seeing you in person.

What the banks want to do is to make you sticky. That’s bank slang for having you deal with them on as many products as possible. The more diverse business they get from you, the lower the odds are that you’ll ever leave them. If you have an RRSP, your mortgage, savings, a term deposit, your checking account, and a credit card, they’re betting you’ll never go through the hassle of shopping around and moving somewhere else.

Is Your Credit Card Safe?

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If you have your credit card handy, here is something that really worries me, and I sure didn’t know: Call the 800 number on the back of your card, enter your credit card number, and you can click 1 or click 4 or whatever prompt to get your balance. But, with some card issuers, there may be no point in there where you need to enter your PIN number! In other words, anyone who has your credit card number can get your balance inside of ten seconds – they don’t even need your card!

The first four digits of your card number identify the bank. So if your card starts with 4535, it’s from Scotiabank. If it’s 4510, it’s the Royal Bank. And if you have a Scotia Visa card, there is no need to identify yourself to get the balance. Never mind what fraudsters can do with it, isn’t there something seriously wrong with that? By the way, American Express does make you enter your PIN number, Royal asks for the last four digits of your home phone number, and Capital One MasterCard asks for your date of birth to assure it’s really you.

I get about 10 to 20 credit card payments a month. Should I be able to access those clients’ balances? I can’t get their credit bureau report and calling their credit card issuer won’t get me anywhere. But I can get their balance? There’s something very wrong here, especially now that almost every cardholder has a chip card that does come with a PIN number already!

Unfortunately, the Federal Privacy Commission has chosen not to respond to my SOS inquiry over the last eight days. However, this matter is worth pursuing: Next stop is the Federal Finance Minister’s office. Stay tuned…

When Is A Sale A Deal?

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I was wondering the other day when a great deal is really a deal? Is it only when it’s on sale, or when it’s priced right, even without a so-called sale? How conditioned are we that it’s only a deal if it’s advertised at 25, 30 or 40% off?

What got me thinking was trying to buy a TV for my brother at Future Shop. Tuesday two weeks ago, the one I wanted was $319 – I just didn’t have the room in my car. Two days later, when I was a buyer, it was in the flyer and $20 higher! It was now an advertised deal, but at a higher price. When I asked the salesman what the story was, the response he gave me was that “that happens all the time.” There was more to his explanation, but I had already stopped listening.

Chevy in the U.S. has now started something called Total Confidence Pricing. It’s another attempt to get away from rebates and temporary sales such as employee pricing, clearance, or the likes. In Canada GM has tried that two or three times in the last decade or so. How successful will they be this time around when other manufacturers advertise so-called sales? Saturn was based on that concept and never did get much market share with their one price and no haggling and…well, they’re gone.

The giant retailer JC Penny, roughly equivalent to our Bay, last year went to something called everyday value pricing. No more screaming deals for the day or the weekend. They are trying to emulate WalMart-type pricing. As of now, it’s a total failure. Sales were down 19% in the last year and another 21% in the last quarter which just ended. For a retail giant, that’s staggering and frightening. Honest and fair pricing all week and all month isn’t working. Their new CEO is from Apple, but I’m not sure he can turn around a 102 year old company.

We’re not that interested in fair pricing it seems. While the deals at JC Penny, Saturn, and maybe Chevy were fair and good, we want the SALE sign screaming at us. We’re suckers for a sale. As long as it says 40% off, or has a $2,000 rebate, we’re all excited and pull out our credit card, or want to know where we can sign up for the financing. We don’t really know if that’s now a good deal or not, but that sign sure makes us buy.

Want To Invest or Need to Cash Your RRSP?

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Last week, the home improvement giant Lowe’s made a $1.7 billion offer to buy Rona. If you owned the stock, it immediately went up to around the offer price of $14.50 a share. Nice deal – but it doesn’t change what we’ve always talked about: Buying an individual stock is gambling and not investing. You’re betting on the 5th horse in the 7th race! Don’t do it.

Good growth mutual funds with a long-term track record are investing, as is a five year or longer time horizon. If you’re buying one stock, it’s gambling. If you know that – do it. But don’t do it with your RRSP money. Do you need a reminder about the Facebook stock offering now down about 40% or the Zynga hot stock down 70%, and not done dropping yet, or a bunch of others?

I do have to confess that Monday I had hoped Rona would just close their doors. Four people in the North East Calgary store wouldn’t do a thing to help my brother and myself. In my experience, Home Depot’s slogan should change to: You can do it and…well, good luck.” But Rona? When my kind and patient brother, who’s a Pastor, walks out, that’s a real problem. That kind of customer no-service is on par with the no service banks and cell carriers!

Fortunately, the fourth Rona store later, I ended up on MacLeod Trail in Calgary and met Angie and Dana. Over one hour these two ladies helped me locate a large amount of shelving AND found it in stock about a mile up and eight isles over. Part of my life is teaching seminars on customer service all over the world. Now I have two Rona stories, but if you’re in and around Calgary – make the drive to the McLeod Trail store, even if you’re in the North East!

Step Away From That RRSP!

According to a recent survey from Scotiabank, a quarter of all Canadians are actually cashing in some of their RRSPs before retirement. Say it ain’t so as the old expression goes.

The three main reasons given are to purchase a home, which is the homebuyer plan, under which you are essentially borrowing the money from your own RRSP and using it for the down payment of your principal residence. Then each tax year, you’re required to pay one-fifteeth of it back until it’s all back in your RRSP. That might be fine – it’s kind of like borrowing from yourself, even though you’re out the interest accumulated.

The other two main reasons are for daily living expenses and to pay off debt. THAT is a problem. Here’s why:

Let’s assume you want to cash $4,000 to pay off some old bills. The first thing that happens is that 10% is deducted as withholding off the top. Because you received a tax deduction when you made the contribution, you now have to pay tax to get it out again. In a 30% tax bracket, $1,200 comes right off the top as withholding. So the bottom line is that this $4,000 you wanted is really $2,800 in your pocket. With me so far?

It gets worse. So it’s saved you some interest and financial pressure to pay off these bills. But you no longer have these savings growing and compounding and here’s what you’re really out:

This $4,000 left alone would double every 7 years at just a 10% return. So today’s $4,000 is $8,000 in 7 years, which is $16,000 in 14 years and $32,000 in 21 years. Nothing for you to do but sit back and watch it grow! That is if you hadn’t cashed it.

The bottom line? You got your hands on $2,800 and it’s cost you $32,000 just 21 years from now. It’s one of the most expensive ways to get your hands on some cash.

Yes, people do it – but there are lots of ways to relieve the financial pressure and NOT cash the RRSPs. After all, knowing is always better than hoping and a $20 investment in the It’s Your Money book to get the tools and insights has to be better than being out $32,000.

You are robbing a lot of tomorrows to pay for yesterday – don’t do it.

First Time Homeowner Advice

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Ah, to be a first time homebuyer. I remember back how excited I was to finally get to own my own home. Well, the bank owned it, but I got to live in it. That the payments will go on beyond most of our lifetimes wasn’t something that was going to dampen my enthusiasm.

But there are also a ton of traps and insights that are really worth knowing to save a ton of money and grief. Unfortunately, most people get their information from friends or family. They certainly mean well, but most aren’t any smarter on the subject than the buyer.

This past month, a family member joined the ranks of newly minted homebuyers. So I’m near the end of tons of e mails, feedback, phone calls, and suggestions. Most of it you can have for $20 in the It’s Your Money book if you drive over to Mosaic, but here are some of the bigger traps, tricks and savers. And most apply to anyone who is already a homeowner with a mortgage:

Shop around for your mortgage: Convenience and ignoring that advice comes with a high interest rate. My relative ended up at 3.09 for a 5-year term and $7,200 under where he started. I also applied at ING Direct on-line. It’s not an easy site and I was really surprised their rate wasn’t competitive. But that changes almost week to week and you do need three quotes.

Take a long-term fixed rate. Rates will go up, and when they do, an extra $200 or so a month will kill most anyone’s budget.

Do whatever you can to get to a 20% down payment. I know that’s asking a lot, but in this case, an extra $15,000 down payment is a saving of $3,400 CMHC mortgage insurance. With interest, that’s $6,700 over the term of the loan.

Set up a separate savings account with two or three months of living expenses. He managed to be able to set aside two months and it’ll let him sleep a lot better knowing he always has two months of savings set aside – just in case.

Borrow as little as possible from your RRSP – you can certainly borrow some of your down payment from yourself, but you do have to pay it back, which just gives you another debt and more payments, or it’ll be taxed each year. I got him down from $20,000 to $15,000. Less money now but big thanks down the road – I guarantee it.

Stay away from money from relatives. Better to borrow from your RRSP than family. If it’s a gift – that’s great, and a blessing. If it’s a loan, don’t do it. Family dinners will never taste the same and it’ll come with judgments and questions. My relative already had a slight taste of that, even before possession.

The week of closing you’ll need a lot of money. The biggest source of trouble is when buyers don’t realize the money they need at closing. Then it goes on a credit card and that balance will now be around for years since they’ve also now got the mortgage payments. You’ll need to budget:
-$800 for home insurance….my relative shopped the two best places and saved $200 and was smart enough to take a high $5,000 deductible.
-$1,000 or so for the lawyer – again, shop around – the lawyer the no-service bank recommended was $300 higher than others. It’s just paperwork, so cheap is great!
-About one months’ payment for interest adjustment to cover the first months’ interest
– Some money for the moving expenses
-And definitely some money for the first months’ repairs and purchases. Nobody moves into a new home without needing at least $1,000 of stuff right away.

My relative did it the right way: He waited and waited until he could afford it, AND he has some money set aside for the inevitable. His shopping around and being smart has saved him $19,400 so far. His house purchase will be a blessing. Thousands of people don’t do those things, and it quickly turns into a nightmare. Do it the right way – it’s worth it, and I can’t wait for Tuesday’s possession date.

Financial Trouble for Seniors?

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More and more stories are showing up everywhere about the financial troubles of seniors. These range from bankruptcy filings to collection troubles and living life below the poverty line. That’s pretty serious when those who have worked hard all their lives are having significant troubles making ends meet. However, it started way before retirement:

An RBC Consumer confidence index earlier this year found that 57% of us have nothing set aside for an emergency. If there’s not even a one-weeks’ pay set aside for emergency, what are the odds those people have any retirement savings?

Then there was a study a few years ago that showed almost 50% of us do not believe that a debt-free retirement is a must. I was somewhere between stunned and in disbelief. Is that really true? Do we believe having a bunch of monthly payment is OK when we reach the point of living on a fixed income, and there’s no more extra money coming in? Or have we just thrown up our hands and given up and given in – to the fact that we’ll never be debt free? It’s just so wrong, and so dangerous, to carry any debt into retirement because your golden years shouldn’t be spent working at the golden arches.

The biggest pre-retirement step you have to take is that your retirement savings have to come ahead of helping your kids with university costs or other loans or gifts. There are a number of ways to pay for university, but there is only one way to save for retirement, and that is you and your savings. You cannot help others if you cannot help yourself. If you are already retired:

-Cut up your credit cards: At 19% interest they are way too dangerous, and even the minimum payment is robbing you from money for necessities. Never mind that the balance will become almost impossible to pay in full. If you’re going to ignore that advice, at least call them and get your limit reduced to $500 or $1,000.

-Do a budget: You need half an hour to put in writing where your net income is going. Start with the priorities of shelter, food, utilities, medical expenses and the likes. THAT is how you will need to spend your income. It cannot be making a credit card payment first. If the card goes in arrears – so be it.

-If your kids owe you money you need to have a family meeting. Get them in the same room and explain the reality of finances for a retired person. Put the pressure on and demand to get paid back. The niceties are over, it’s time for them to grow up and pay up. You can’t care any longer if they get a loan, line of credit or put it on their credit card – you want to be repaid.

-If you have payments on a vehicle, it has to get sold – today. Those payments are a budget killer for everyone, especially those on a fixed income. You can’t afford them.

-If there is a possibility of collections down the road, your savings and pension money has to be in a bank different from the one who has your credit card, line of credit, or overdraft. Banks have the right to just grab your savings to offset what you owe them. Before that happens, move your money to a financial institution where you do not have any borrowing. It’s critical that you do this, or they can wipe out your savings to pay themselves back.

Financial Trouble for Seniors?

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Anecdotally, more and more stories are showing up about the financial troubles of seniors. These range from bankruptcy filings to collection troubles and living life below the poverty line. That’s pretty serious when those who have worked hard all their lives are having significant troubles making ends meet. However, it started way before retirement:

An RBC Consumer confidence index earlier this year found that 57% of us have nothing set aside for an emergency. If there’s not even a one-weeks’ pay set aside, what are the odds those people have any retirement savings?

Then there was a study a few years ago that almost 50% of us do not believe that a debt-free retirement is a must. I was somewhere between stunned and in disbelief. Is that really true? Do we believe having a bunch of monthly payment is OK when we reach the point of living on a fixed income and there’s no more extra money coming in? Or have we just thrown up our hands and given up and given in – to the fact that we’ll never be debt free? It’s just so wrong, and so dangerous, to carry any debt into retirement, because your golden years shouldn’t be spent working at the golden arches.

The biggest pre-retirement step you have to take is that your retirement savings have to come ahead of helping your kids with university costs or other loans or gifts. There are a number of ways to pay for university, but there is only one way to save for retirement, and that is you and your savings. You cannot help others if you cannot help yourself. If you are already retired:

-Cut up your credit cards: At 19% interest they are way too dangerous, and even the minimum payment is robbing you from money for necessities. Never mind that the balance will become almost impossible to pay in full. If you’re going to ignore that advice, at least call them and get your limit reduced to $500 or $1,000.

-Do a budget: You need half an hour to put in writing where your net income is going. Start with the priorities of shelter, food, utilities, medical expenses and the likes. THAT is how you will need to spend your income. It cannot be making a credit card payment first. If the card goes in arrears – so be it.

-If your kids owe you money you need to have a family meeting. Get them in the same room and explain the reality of finances for a retired person. Put the pressure on and demand to get paid back. The niceties are over, it’s time for them to grow up and pay up. You can’t care any longer if they get a loan, line of credit or put it on their credit card – you want to be repaid.

-If you have payments on a vehicle, it has to get sold – today. Those payments are a budget killer for everyone, especially those on a fixed income. You can’t afford them.

-If there is a possibility of collections down the road, your savings and pension money has to be in a bank different from the bank who has your credit card, line of credit or overdraft. Banks have the right to just grab your savings to offset what you owe them. Before that happens, move your money to a financial institution where you do not have any borrowing. It’s critical that you do this or they will wipe out your savings to pay themselves back.

Are You Going Out For Lunch Today?

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If so, you’re not alone. According to a Visa survey released yesterday, 60% of us eat out once a week or more. The highest percentage is in Ontario while the Western Provinces tends to eat out the least.

Eating out is convenient, it’s faster than making lunch and – well, we can get kind of lazy. But convenience comes at a price. On average our eating-out meal is just under $9 a pop. Not that big a deal if it’s once or twice, and a lot more for a family of four. At $9 it adds up quickly, and even quicker for the 61% of people whose average is up to $13 at a time.

Who cares? That depends on the state of your finances. It’s certainly ironic that this survey was done by a credit card company. When we pay by credit card, no matter what it is, we spend an average of 12 to 18% more than paying cash. McDonalds has an almost 50% increase in per person sales on credit cards, and vending machines who take them increase their sales 178%.

For anyone who is in debt, these little $10 lunches here there, and all the time, are some of the biggest killers to getting out of debt. There isn’t one magic bullet to changing your finances around, it’s all the $10 and $20 buck stuff like a leaky faucet. If you’re broke or on a budget you shouldn’t see the inside of a restaurant, unless you work there – period. Eating out is 75% ambiance and 25% food costs! There’s nothing wrong with that, but broke people can’t afford it.

If you want to turn your finances around, you need to do a budget. You’ll need to put in writing at the beginning of the month what money you’re spending on what category. Once the budget is set, the only way to spend extra money is to take it out of another category. It’ll give you total control of your money, and you’d be amazed at what you’ll discover about your spending. I’ll guarantee that anyone who does a budget for two months will find at least a couple hundred dollars in savings!

When it comes to eating out – go for it. But it has to be in the food budget. When the food budget is done – you’re done! With the food category, the most effective way is to take the cash budgeted for food for the next two weeks and put it into an envelope. That cash, and only that cash, is used for food. It’ll be very powerful to see that money shrink and shrink – but you’ll actually see it. Paying some of it on credit card, using a debit card for lunch here and there, or buying the odd thing with cash means you’ll have no idea of what it all adds up to. But an envelope with the cash for the next two weeks is powerful and visual – and it works, and you’d be amazed at the money you’ll save.

Living on a cash food budget takes discipline. Plus, your broke friends at work will make fun of you when you don’t go out for lunch with them all the time – that’s why THEY are broke and will continue to be. Anyone who is trying to get ahead, also on a budget, or debt free, will be your biggest cheerleader. But there are more broke people than debt-free people, so get ready for them to pick on you.

One last thing we talked about three weeks ago: If you want to save some money in the kitchen, stick to a budget, and/or reduce waste, there are two new web sites that are kind of cool. Both are set up for you to enter the ingredients you have in the house and will ‘translate’ them into figuring out what you can make for dinner with what you have! The two sites are www.saymmm.com and www.supercook.com

Another Wave Of New Mortgage Rules

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Another round of new mortgage rules was announced by the Finance Minister last week.
Minister Flaherty told the bank a few months ago to tighten lending and now is doing it for them. In his words: I’ve been listening to the market and I don’t like what I hear. In other words, we’re still borrowing too much, and the government is still very concerned about our debt levels.

Canada has 9.6 million home owners who will only be affected if they decide to refinance. But tighter restrictions will impact the 260,000 new buyers each year.

Refinancing is now capped at 80% of the home value, down from 85%. The good news is that it will save borrowers an average of $6,000 mortgage insurance that kicks in over 80%.

The debt ratio of what you can have for a maximum mortgage payment is reduced to a total of 39% of your gross income, down from 44%. I’m all for that. Even if you do the math on 39%, it would be pretty tight for affordability, and remember that it’s based on your gross income – and nobody takes home their gross pay!

The maximum amortization for mortgages is now back down to 25 years total. Over the past four years it was up to 35 years, down to 30 and now back at where it should always have been: A maximum of 25 years.

As you can imagine, the mortgage brokerage industry is incensed. They claim, and with some justification that this will impact home prices and the $66 billion renovation industry. Less refinancing money is less spending – but then it’s still legal to spend cash instead of borrowed money!

As to the impact on home prices? When the government moved from 30 year maximum amortization to 30 years, home sales were impacted by about three percent. Tightening that again, plus the average home price, could take a lot of the 260,000 new buyer each year out of the market.