Tag Archives: borrowing

Broke People Can’t Stimulate the Economy

At the risk of 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.

While we may avoid a recession, our consumer spending is going to slow down. Lots of people are still using COVID savings, but credit card debt is rising and every year millions of people are needing to get or renew a mortgage at rates of four to five percent higher and inflation has made almost everything a whole lot more expensive. That has to create a slowdown of some kind, in some ways, at some point in time. 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!

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.

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.

Where Exactly Is All That Money?

Good news and bad news: It’s tax season, and most of us are likely getting a refund. That’s both the good news, for obvious reasons, but also the bad news.

Most people tend to think that a tax refund is free money. As a result, they tend to treat it as such, and generally blow it. Unfortunately, it’s not found money – it’s just refunding money that you overpaid all year long.

A big refund is bad news in that you have had too much money deducted from your pay each month. All you’ve done is given the government an interest free loan. You need to go to your payroll department and increase your exemptions. When you do that, it’ll increase your net income on each paycheque.

When you now have that money on each paycheque, you can use it all year long and not the government. If it’s a big increase in your net pay, use it to immediately start an RRSP or Tax Free Savings Account. You’ll be funding it with free money and your net pay won’t be any less than it was before you fixed your deductions!

One more question with this being the big tax refund month. I was thinking the other day where exactly all our money is, and has gone.

Sometime today, just add up what you’ve earned over the past ten years. Or make it five years if you haven’t worked for a decade. It’s not hard to do, and close counts. Take your T4 slips, or a calculator, and multiply your income by the last 120 months. Sure, you had raises, promotions, or whatever. Close counts.

What you’ll have is a pretty staggering number. Your pay over the past ten years has added up to a huge amount of money. Someone earning $3,000 a month has made $360,000 in the last decade. Yet, most people have never thought of that.

Now add up what you have in RRSPs, saving, and investments. The difference between what you have in savings and what you’ve earned is spent and gone. I know, I know – lots of that money includes rent, mortgage payments, groceries, utilities and the likes.

But, if you’re like most people, what you have in savings is less than 5% of what you’ve earned. That should scare you, or should be a huge wakeup call. I’m not even talking about adding up your monthly bills or the total debt load you have.

Just comparing your 10-year income to what’s actually left is enough food for thought. Now think of how many more decades you can, or choose to work. If you do another decade what you’ve done for the last decade in borrowing, not doing a budget, and not saving much, where will you be? Financially, can you afford another decade like the last one?