Tag Archives: budgeting

The New Financial Reality Part II

Two weeks ago we talked about what to do: Getting the family involved, stopping any savings and investments, and your financial priorities of prescriptions, food, shelter, utilities, basic clothing and transportation.

However, the reality of $4,000 in bills on $2,000 of income brings up three big “should you” questions:

Should you pay minimum payments on your credit cards? If you can – absolutely. If you have the available credit, I would also take a cash advance then use that money to make the minimum payment. It’s not a solution, but it’s a way to tread water and protect your credit rating. If you can’t – plan B may be to ask the card issuer for a deferral, but that depends on how much the minimum payment is, whether you’re prepared to go through the qualifying again on the phone, and your priorities.

Should you get some money out of your investments or Tax Free Savings Account? Yes – if that’s what it takes to make minimum payments for some of your debts. It’s better to borrow from your future self than a deferral that just stalls things off and compounds interest.

Should you cash some RRSPs? That’s different than other investments, because there are big tax implications next April since it’s considered taxable income for 2020. If you have absolutely no choice – the answer is clear. If you can avoid it for at least another month or so – that would be even better…

There is a really important chapter in the Money Tools book called “Today’s problems become tomorrow’s nightmare.” Before you cash any of these, you really really need to read that chapter.

When you need to relieve the today pressure with tomorrow money, there’s a steep price to pay down the road. Cashing any investments relieves the financial pressure today but leaves you in trouble down the road. Not investing right now is totally logical, but cashing out requires you to remember that the $5,000 today isn’t growing anymore for retirement. That $5,000 today, if left alone, turns into $40,000 that you do not have in 21 to 25 years when you may really need it.

Secondly, the government programs of the $500 a week or your EI are fully taxable. So the today help is great, but you will need to pay tax on that come next April. No, you probably can’t set aside the 20 to 25% you’ll need for tax today. But you also can’t claim that it’s a surprise you’ll have to have the money to pay your taxes.

Lastly, something a little more hopeful if you have a mailbox. I found a great picture that might prevent you from getting more bills that you don’t really need right now. Oh if only that would work….

Your New Financial Reality Plan (or not…)

Firstly, and arguably most important: The major Bell sponsorship of Mental Health day in January isn’t just a one-day and one-off. It’s just as important today as next week and every day. Taking care of yourself is not an occasion – it’s a process. So, go to letstalk.bell.ca for a lot of tips, insights and practical tools. In addition to that, talk to someone. Being able to talk it through is an incredible tool that doesn’t cost anything, but pays off in measurable ways, because you’re not alone.

When it comes to your finances, there are two different issues: The today actions and the down the road issues that we can talk about another day.

Psychologically we tend to think the good times, good incomes, or investment returns go on forever. They don’t. We also tend to think that, in bad times, they’ll never end – they do. You decide how long this storm is going to last – then make a financial game plan of how to get from here to there with a lot less income and the same bills you’ve always had.

1.. Your entire family has to be involved, in the know, and on board. Your partner is a given, but I would also explain what’s happening in financial terms to your kids in language and information that’s age and maturity appropriate. If you can explain why grandma can’t visit you can certainly explain some basic financial realities in the same way.

2..Stop anything that takes away money on a monthly basis that is optional: Stop your RRSP contributions, children’s education savings, any amount auto transferred to your savings, payroll deductions for investments or retirement plans – everything. For the next few months, you need cash and not a long-term wealth building plan which takes money away from the today storm. Every one of these money-savers are far preferable to any deferrals of your bills – period.

3..Write down your financial priorities: They will be the same for every person: Prescriptions, food, shelter, utilities, basic clothing and transportation. You can look at financial books from the 1950s to someone like Dave Ramsey on about 400 radio stations in the US, and others that’ll all be the same. (I added the prescriptions for obvious reasons). Those are the order of your priorities. Besides these first priorities, write down what those cost you each month. Does whatever income you have now cover these basics? If so, you’re doing well and should give yourself permission to breathe!

Reality stinks right now, but reality is that less income means less money can go towards non-priority payments. You cannot print money, and you are not exempt from the law of gravity or math: $2,00 of income will not cover $4,000 of monthly bills.

4..When the first priorities are paid, if there’s money left over, the decision of what other bills to pay is yours. That’s very subjective and everyone will make very different decisions.

In Case Of A Postal Disruption

Here is a heads up that you should do each and every month. Whether it’s in the event of a Canada Post strike or not, you need to do a little check list of all your bills.

You know I really want you to do a budget, then you’ll have it anyway, but do a little list of all the bills you have to pay in a month. With no mail, or if you ever don’t get your mail, you still have to pay the monthly payment. I forgot, I didn’t get an invoice, or any of those excuses don’t get you off the hook.

The payment is yours to make and all the legal documents say that they’re due – whether you get a statement, reminder, invoice or not. A little check list will just be an easy way to see that you’ve made a payment to everybody during a strike, or in any month.

Make sure you add the annual bills such as house or car insurance, property tax, etc. on the list, too. If you don’t pay something like a utility bill, the service charge is around 2.5% for being a day late. On the other hand real debt such as your credit cards or line of credit, absolutely destroy your credit rating if you’re late. And that stays on your credit file for seven years. That’s a lot of damage for missing a payment, or not being pro-active during a postal strike, or any month.

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

A Family With 13 Kids AND Saving 35%

Rob and Sam Fatzinger have 13 kids, one income, and a free and clear home just outside of Washington, DC. If you want their full story, just go to the Washington Post and type in their name.

Here’s their story in short: Rob made $40,000 a year just a decade ago, but now earns $100,000, plus, and mows lawns in the neighbourhood for a few extra bucks a month. His stay-at-home wife home schools their 13 children with assistance from a tutor. In 2000, they bought a fixer-upper foreclosure with $50,000 down and paid off their 15-year mortgage early, and Rob will retire early at age 62.

They had a lot of help from the community in renovating and expanding the home. The Fatzinger’s also receive a lot of support, where friends and neighbours have helped with gift cards for food, and even used vehicles over the years. Their biggest cost is their food budget that was running $1,600 a month. Today, their savings rate is 35%.

All kids have long ago been educated to know they will not receive help with college costs. Yet, several of them have already graduated from college with part time jobs, scholarships, and ZERO student loans!

But that’s not the story. If you’re really quiet, you can hear what most listeners are thinking right now: That none of that could ever happen in their life:

Judgment and strike 1: I couldn’t buy a place for $150,000

Strike 2: I could never take on a part time job

Strike 3: I wouldn’t accept donations from people or ask for help

Strike 4: I could never do a 15-year mortgage or pay extra on it

Strike 5: I can’t save 5% of my pay, never mind 35%

Strike 6: He makes $100,000 –I don’t…

Strike 7: I couldn’t tell my kids I won’t contribute to their university costs

Strike 8: I’d never be able to retire early

Your attitude determines your altitude. Instead of the judgments and saying “I couldn’t do that” change the wording to: I’m not prepared to do that. Then at least you’re being honest with yourself. Because, people who say it can’t be done should stay out of the way of those who are doing it!

Teens and Money (Or Lack Of)

Your money rules in the house and for your teens will set their template for decades to come. That is, if you have a backbone, you mean it, and enforce it. That’s even more critical when parents are separated or there are grandparents with money around.

When you have rules for money, there’s no confusion because the rule is set. If you rob a bank, you’re going to jail. That the societal deal. It’s not confusing, it’s not a sometimes thing, and it’s pretty black and white and everybody knows it and abides by it – there’s no confusion.

With your teens, especially girls, there needs to be a clothing budget. You set the number and that’s it. It’s YOUR money. $100 a month, every two months, or whatever you pick. If you kid wants to bargain shop, that could buy four, five, or six things. If they want to impulse shop or buy the latest and coolest, the money will be gone in 30 seconds.

You need to remember that the best sales people in the country aren’t born. They learn at home manipulating their parents! Every teen has a wish list of 50 things they absolutely have to have. If it’s your credit card, why not. If you give them a $100 Visa gift card, watch how magically 45 of these things aren’t important anymore – because it’s their money and it’s a fixed amount! Try it – you’ll be amazed how their thinking and priorities totally change.

When it’s an expensive purchase, give them the option of buying it right now, with their money, or waiting until Christmas. You’ll see that waiting will become a lot easier if those are the only  two options. Plus, if they’ve paid for it themselves, they’ll be a lot more careful with it and it’ll probably double the lifespan before it’s wrecked or lost. Last year a lady from Penticton emailed me that her son had busted his phone screen for the third time. She was asking what to do? Well, she’s paid it three times – so keep paying…If the money rule is that she buys the phone and he pays for downloads and fixes, watch how careful he’ll be with it. If not, that $100 fix will just happen once…with his money.

Even if you can afford to buy everything your kid wants, you’re destroying their financial future if you do! In their 20s and 30s, they won’t be able to afford that lifestyle with their own money. That leaves two choices for this generation: Get it with borrowed money or you keep sending them a cheque. Because the third option of radically changing their lifestyle is almost impossible if you’ve set the template for over a decade at home.

Set the limit, set the rules, communicate them clearly and stick with them. The real gift you can give your kids or grandkids is not this one purchase or another. It’s the lifetime gift of teaching them how to handle money, budgeting and priorities.

The “Average” Person’s Debts

Maclean’s magazine had a small section on our average debts that was quite interesting. And, according to Statistics Canada, the average person in debt isn’t an unemployed renter in their 20s.

Some of the information is quite eye-opening:

In total debts, BC and Alberta run neck and neck for a record we really don’t want to have: BC averages $155,000 in debt per family while it’s $157,000 in Alberta. Only Ontario is close at $125,000.

Don’t think high income earners are always savers. We’ve talked before that the more income you earn, the less likely it is that you’ll live on a budget or are careful about your spending: 57% of the total consumer debt in the country is owed by people who make more than $100,000. But they’re a tiny group in the population! Ah, but they’ve got the income to pay the big mortgage, car, and credit card payments. No, not to pay them off, just the payments each month assuming there isn’t a hiccup in their earnings.

What’s strange is that people who have the most debt claim that they are the most financially literate. Is that backwards or what?
45% say they’re very financially literate owing over $250,000
35% respond the same way owing $150, 000 to $250,000

One sad fact is something we talked about before. It’s the 65 and older age group who still average $66,000 of debt.

The age group of 45 to 64 has $103,000 of debt. So, in the highest earning years of our 40s and 50s we manage to pay off only $37,000 of debt? Any family in the 40 to 50 age group likely has their kids moved out and still can’t save OR pay off debts? That’s cause for concern and sad.

In a US survey done by the Consumer Federation of America, along with Primerica, the average respondent admitted they had made at least one financial mistake averaging $23,000. THAT is one expensive lesson, and for many people not something they’ll recover from for decades.

The Panic Shopping Just Before Christmas

Four more shopping days until Christmas, so you know what that means, right? Any semblance of reasonableness, budgeting, and comparison shopping is done and over with. Now, it’s mostly panic. And retailers know that. Christmas week is not the week for any great deals.

The average person spends $104 when they go to a mall. That has to be way higher when we have a long list of presents still to buy and not a lot of time. I don’t know if it’s too late to get you to your bank machine and draw out the cash for the rest of your shopping. I hope you’ll do it, because we spend about 18% more when we pay by credit card and, this is purely my guess, another 25 to 50% more in panic mode. If you have the cash on the counter, you’ll literally feel the pain of parting with that money and you WILL reduce what you spend.

Of course, part two is the old stand-by of gift cards. For two years, their sales have been pretty stagnant, but this year, sales are way up and will be over $30 billion in North America.

I’m sitting here looking at a $20 bill. I don’t see an expiry date and it doesn’t say anywhere on the bill that I have to use it at a certain store. It’s nice to know that this $20 is good anywhere, and anytime. That’s not the case for gift cards.

I am not a fan of gift cards unless they are at a discount, such as $80 for a $100 gift card or buy one for $25 get another for $5 free. Give the cash with a note of what you’d hoped they’d use it for and not the gift card. Remember that over 8% of gift cards are never used, so that’s $240 million down the drain, and gift cards are no good if the retailer goes out of business.

I’m fine with those from Wal Mart or Tim Horton, Starbucks or Amazon, but the smaller the retailer, the bigger the risk they won’t be around to honour the gift card. They have your cash and you have nothing.

Conversely, if you do get a gift card, use it right away for the full amount. If there’s a balance left, keep it on the fridge and use a felt marker to note what’s left so it doesn’t go to waste, or give it to someone else in line at the check out, if it’s a small amount left.

Yesterday’s U.S. Elections

Yesterday, the U.S. had their mid-term elections and there are certainly some interesting philosophies and policy suggestions raised when it come to debt and financing.

A number of very conservative Tea Party Republicans were elected as senators yesterday. Their common belief, and quite correctly, is that the deficit (spending) is out of control, and spending has to be curtailed – NOW. OK, but between March and June of next year they will need to vote on increasing the debt limit. That’s the total the government owes, but something nobody really talks about at all. That’s kind of like the U.S. credit limit, and it has to be voted on a specific day when the debt ceiling is reached.

Will these senators stand on principal and refuse to vote for it? If so, you are going to see a huge, immediate, and world-wide impact on the stock market, consumer confidence, the dollar, and many other areas. It will also immediately shut down all but essential government services. Will they do it on principal, no matter what the implications?

What drove me insane yesterday were a bunch of politicians flagrantly refusing to answer direct questions of what spending they would cut. For the entire election campaign, it was nothing but generalities and buzzwords. That sounds nice, but specifically, what would you cut? Pretty much all of them said it couldn’t, and wouldn’t be defense, social security, and medicare. Fine, but there’s a problem: These three areas are around 93% of all federal spending. So what does that leave?

The equivalent is that you can’t or won’t cut your spending on housing, vehicles financed, and utilities. What does that leave where you can have a meaningful impact on your debt? Yup – nothing. Take a $4,000 income, and now work with only 7% that you can impact. That’s $280. Can you work your way out of an incredible mountain of debt when all you can work with is maybe 5 or 10% of that $280? It’s nuts. It’s political talk, and it’s ridiculous.

There are literally trillions of dollars that the U.S. government has in unfunded liabilities. That’s IOUs for pensions and medicare that are not funded and for which there’s no money. Yet, there was no talk about that. They can’t even come up with specific solutions to today’s debt – never mind the next wave that will hit within five or ten years.

There’s a Canadian politician that coined the phrase: Elections aren’t the time to talk about policy. Yesterday’s elections reminded me of that. Or essentially, we’re pretty much too stupid to understand policy questions and meaningful solutions.

Lastly, you know I’m not in favour of debt and borrowing. But in the U.S., and Canada, there are only three groups that can spend in the economy: Consumers, businesses, and the government. In a recession as severe as the one just ending, consumers stopped spending, as did businesses. Who does that leave? Can you imagine how much worse it would have been without the government infrastructure spending?

And ironically, the U.S. Chamber of Commerce heavily lobbied politicians two years ago to vote in favor of the stimulus programs. A year later, they’re spending tens of millions in campaign money against those same people who did! But that’s not much different than what some of the opposition parties did in Canada. Ah, if we could only be like politicians and have it both ways – all the time. Unfortunately, for us, in the real world – that’s not reality.

59% Of Us Can’t Do Without One Weeks’ Pay

Last week, the 2nd annual survey by the National Payroll Association was released. Unfortunately, it’s bad news – and something we have been talking about a number of times in the last year.

According to the survey, 59% of people would be in financial difficulty if they missed one week of pay. Just think about that for a minute. One week of pay would cause a significant problem for almost two-thirds of workers. That figure is actually much higher for young people and single-parents.

Let’s be honest: If we can’t do without one week of income, we are really close to the edge, financially, and in trouble. With the national average income of around $45,000, take away 20% or so in taxes, and the average net pay a week is really about $700.

In other words, $700 stands between us and serious financial trouble. Just imagine what kind of stress that creates in our lives. It’s not a fun way to live. But 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.

In the It’s Your Money book is a huge headline that says: It might take two minutes to spend it, but it’ll take years to pay off. It’s the debts and bills that are killing us, more so than our incomes, if we were to be honest with ourselves. In order to change things around, we can spend less, or earn more. Either one works, and both together change our financial situation that much faster.

If we wanted to, we can sell our car with the big payments by next week, and drive a $2,000 very used car 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 turn things around. But until then, we keep confusing our needs with wants, and here we are: almost two thirds of us are on a financial cliff.

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?

That’s not a life – that’s surviving, not thriving, and it’s not a fun way to go through life! At some point, all the stuff we’re still making payments on isn’t worth the financial pain we’re saddled with. But it isn’t that hard to turn around, if we focus, if we want to, and if we choose to be really disciplined for a year or two.

Step one: 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. Right now, you think you know – but trust me, you don’t. Your goal is to cut your expenses by $150 a month – no matter what it takes.

Step two: Set up a separate savings account. The $150 savings, and whatever $20 or $30 you can find goes into this emergency account until you get one weeks’ pay in there. In three months, you’ll now be better off, financially, than two-thirds of the country, and your stress level will be seriously reduced.

Are You Running Your Own Ponzi Scheme?

A few months ago, 60 Minutes re-ran a story on the 2nd biggest fraud since Bernie Maydoff, with reporter Steve Kroft. It was an interview with Marc Drier, whose ponzi scheme defrauded people of almost $400 million.

I want to read you a section of the interview, and then translate it to you and me:

Kroft: So you were digging yourself into a hole?

Dryer: Very much so. You start with something that is manageable and small. You know it’s wrong, but you think you can fix it and you can’t get out of it. It becomes quicksand. I had to keep meeting obligations that became bigger and bigger. (I was) creating an illusion, all mortgaged to the hilt.

I recognized in the last couple of years that what I saw as a $20 million mistake had grown into a mistake of a few hundred million dollars. And then, I did some increasingly irrational things, because I wasn’t thinking clearly…(and) I’ve lost everything.

Now, let’s translate that to the financial situation so many people face:

So you were digging yourself into a hole?

Very much so. I started with some borrowing that was manageable and small. You know it’s wrong, but you think you can pay it off soon, but can’t get out of it. It becomes quicksand. I had to keep meeting obligations and payments that became bigger and bigger each month. (I was) creating an illusion of a lifestyle that was all mortgaged to the hilt.

I recognized in the last couple of years that what I saw as a small mistake had grown into a mistake of (however many dollars).

And then, I did some increasingly irrational things, because I wasn’t thinking clearly. Like taking cash advances, stretching my car loan, getting a line of credit, living on my overdraft, going to a Payday lender, getting behind on my bills…(and) I’ve lost everything.

That’s millions of families that don’t or won’t do a budget. Families that refuse to live on less than they earn, and still kid themselves into thinking that loans and borrowing are a blessing and part of a solution.