Tag Archives: emergency savings

It’s RRSP Time – But You Shouldn’t Contribute This Year

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There’s a news story this week that most Canadians want to put some money into RRSPs but don’t have the cash. That’s great news!

If you want to be a doctor, you’re not doing surgeries today. You’re getting your MD, and then you’re ready to do surgeries. In the same way, it’s not the other way around with paying off your debts versus savings. It’s pointless to put some money into RRSPs while you’re in debt, or to send $200 to Visa and the next day put $200 into your savings account. Just send the $400 to Visa and get done with it. Then, and only then, can you focus 100% on getting wealthy and save the whole $400 a month.

If you have debts, forget savings and your RRSP for a year or two. Your tax deduction and interest aren’t going to equal the interest you’ll save by paying down your debts. But this is not about math – this is about behaviors and it’s 80% psychological. If it was about math, you wouldn’t sign up for a stupid 20% credit card or owe on your line of credit a decade later.

And if you think that borrowing to put money into your RRSP is a good idea, you’re doomed to be in debt for a very long time to come. You must be kidding? You’re broke, in debt, and your best thinking figures that the solution is MORE debt? Hello? If that’s what some financial person at the bank or wherever is telling you – run away fast! That person is on commission. They are making money from selling you to borrow. They’ll make money on the loan, on the RRSP, on commissions up front, and on trailer fees. THAT is the person you’re going to listen to? You have to be kidding me.

I’ve seen it hundreds and hundreds of times when people attempt to put a little into their RRSP, pay $20 extra on the credit card and juggle savings and debt. It won’t work – guaranteed. You save $50 in an RRSP and just think: That doesn’t add up to squat and you’re right. You pay $50 extra on your credit card and realize: That’s not worth the effort and I’m not getting anywhere so what’s the use – and you’re right. That shotgun approach won’t work. It takes 100% focus and commitment to one thing! Take a step back from savings and only focus on getting every debt paid off except your house. THEN you’ll have so much freed up money you’ll end up with five or 10 times as much into savings as trying to do everything off the bat.

Guaranteed, you’ll become debt free in a year or two, but only if you follow the steps one at a time:

Step one: 1 week of your net pay in an emergency savings account. It’s more than 60% of people have and turns your next emergency into an inconvenience.

Step two: Get debt free on everything but your mortgage. No more credit cards or borrowing – it hasn’t worked so far in your life. List your debts smallest to largest. Pay minimum payments on everything but the smallest.  That smallest bill gets every spare dollar you have. That’ll  pay it off in just a few months. Then onto the next smallest and you’re not looking up until all your debts are paid off.

Step three: 3 months of all your monthly expenses in the full emergency account

Step four: Save 10-20% in investment and retirement money

Step five: Now start paying extra on your mortgage.

If you want to reinvent the wheel and do it differently – good luck to you. E mail me in three or four years when you’re right back to where you were today – honest!

Can You Do One Cash-Flow Statement?

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Last week we briefly touched on the fact that gas and groceries keep going up. That makes your expenses go up and harder to save anything.

If all or part of your logical brain knows you’re spending more than you’re earning, that’s frustrating. But you can’t turn it around without a budget. That’s something 95% of people won’t do, because they somehow think it puts them in a straight-jackets. But it’s quite the opposite: A cash-flow statement, even just once, sets you free. You’ll know how much you’re prepared to spend for what each month. You’re not spending an unlimited amount of money that you don’t have groceries, lunch out, or the kids.

The best way is having the cash in a number of jars or envelopes. One envelope will be for groceries and food stuff. Every two weeks, the cash from your pay goes into the envelope. When you go to the store, it’s paid out of that money. When it’s gone – you’re done until the next payday. It works – but will you do it?

Hear me really clearly: You will never have enough money for what you WANT to spend. Never – no matter how much you earn. But you do have enough money for what you need to spend. But you have to manage your money, and not have your money manage you. I guarantee that most of us have a lot of our expenses go to the category of “not really sure.”

Save two weeks of your net pay in a separate emergency account.
Do a cash-flow statement of where your money is going to go for a full month. You’ll be really bad at it for the first three months and then you’ll love it and be really successful with it AND have at least $200 or $300 left over each month compared to right now.

People don’t decide their financial future with specific goal setting. They decide their habits, and their habits determine their financial future.

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!

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.

You Can’t Borrow Your Way to Prosperity…Honest!

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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.

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

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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.