Tag Archives: investing vs debt

Someone Actually Did a Written Budget! Wow

Good morning George. I’ve just finished your Money Tools & Rules book! Thanks so much and well done on a great book!

We have two kids between 7 and 10-years old. I have done up a budget and I have reduced my monthly expenses a reasonable amount to add to my payments towards my credit card and line of credit debts. I have that goal of paying off those debts to be able to buy a house in the future, while also looking to gain a foothold in investing.

Part of my reply that relates to (this portion of) the email: I only ever answer questions of what I would do since I never have all the information. Plus, caring isn’t telling someone what they want to hear, it’s caring enough to be honest and direct.

Nice that you’re one of the rare people that put their spending on paper to be able to see it AND reduce it a bit – that’s pretty impressive. And remember you’ll be way over here and there – just keep tweaking it for the variable bills and DO have some “me” money in there and some “kids” money. And tell them in an age appropriate way some of the budget stuff!

When they know the rule of what their “me” money is AND what it can go to (clothes, field trips (?), school extra billing (?), dollar store, snacks, etc) they’ll learn to live within their own budget and it’ll take most of the hassle out of shopping with them. Make it cash in an envelope for each of them so that they can “see the money,” or lack of it, towards the end of the month! This, however, is not their (hopefully) earned allowance! That’s their money to invest – give – spend as you’ve defined the rules for it.

Your investing goal is confusing as it states opposite things in your full email: If you’re NOT adding to your investments,  you just need to follow the step up plan in the book to the letter, which would be credit card only – minimum payment on LOC. Then the LOC with the minimum you paid all along AND all the money you’ve paid extra on the card that’s now cleared.

If you meant ADD to your investments as well: Unless you’re a doc, vet, or someone else making maybe $150k or more, you’re doing the exact opposite of what works. I hope you’ll email me in a few years that you’re in roughly the same position, just a few years older. Plus, you won’t meet the debt ratios, etc. of the Trudeau stress test for debt load, total debt service ratio, etc. if and when you want to qualify for a home purchase.

Skip Your RRSP This Year For a 27% Guaranteed Return

If you’ve procrastinated making an RRSP or TSA contribution for 2020, you’ve got eight days left, but you might want to skip it this year.

What if I could get you a guaranteed and totally risk free return of 27%? Would that sound better than an RRSP or TSA this year? If you carry a credit card balance, like half of card holders, that’s exactly what you’ll get. Here’s an excerpt from the Money Tools book (page 144):

If you have a 10% line of credit, even in a pretty low 25% tax bracket, your real return will still be 13.3% if your priority is to pay that off.

What’s the bad news? You cannot do that if you want to save and become debt free at the same time. I’ve never seen anyone do it in 25 plus years, and you can read any number of Dave Ramsey books and find him confirming the same thing for just as many years.

We just don’t have enough money left over after paying all of our bills to make that last $200 bucks or so stretch to cover investing and paying off our debts. We can barely make the minimum payments each month. If you believe you can do both, it is the equivalent of attempting to defy the law of gravity. It won’t happen – but good luck to you. In two or three years, you’ll be exactly where you are today.

If you take three, four or five thousand dollars this week and put them into an RRSP or TSA while you’ve got high interest debt, such as credit cards or an overdraft, you’re making a big mistake.

If you’re going to borrow money for an RRSP contribution, I would suggest it’s an even bigger mistake because you’re adding to your debt and monthly payments. That’s exactly the opposite direction of where you should be going.

Yes, you should save and invest for your retirement. But a year or two of pressing the pause button is the only way to become debt free. If not, you’ll be another two or three years older, just as broke and just as poor. Before you make that pretty critical decision, read the Money Tools book chapter: Getting from here to debt freedom on page 207. You can get it from Mosaic Books on Bernard before you head to the bank to make your 2020 contribution…

(And since I always show my work: The $20 book, if you follow the two chapter sections, and what we talked about on the radio today, will end up saving you $1,530: You won’t have the 10% historical return of an investment over the next three years = out $993 compounded for three years. But you’ll have $3,000 less credit card debt at 27% (in 25% tax bracket) for a saving of $2,430. $2,430 less $993 = $1,437…excluding any tax refund – if any – if RRSP)

It’s RRSP Deadline This Week

Ah, the annual week of feeling the pressure to contribute to your RRSP with the hundreds of TV and radio ads is upon us. But stop a second and think:

Last week the National Post/BMO survey came out showing where we put our money once we’ve invested in an RRSP or a Tax Free Savings Account and 57% of all the money is in cash and 23% is in GICs. WHAT?

The no-service banks have spent millions of dollars this month to guilt you into contributing to your RRSP and you probably fell for it. But 80% of the money stays there and makes you no return? That’s crazy! At half a percent interest, your money will double in 140 years! Even if you’re getting a 1% GIC return, it doubles in 70 years. Is that when you’re retiring?

Banks are like airports. You go to the airport in order to get someplace. You don’t go there just to hang around for a few weeks. Banks are the place to park your money for a bit, to have a chequing account, and your emergency savings account. Banks are not the place to do investments.

Think of it this way: You donate your $5,000 RRSP money to a teller or someone in a fancy office that’s on commission. But banks keep less than 10% of it in cash. More than 90% is lend right back out on a 4% mortgage, a 6% car loan, or 20% credit card. THEY sure know what to do to make the money grow and it’s almost all free money.

It’s the best legal scam in the world: You get half a percent – they lend it out and make between 4 and 20 percent. That’s great if you‘re the bank – lousy if it’s you. If you own a clothing store, what’s your biggest expense? It’s getting clothes into inventory so you can sell them at retail. If you own a gas station, what’s your biggest expense? It’s getting the gas at wholesale into the tanks that you can then sell at a profit. But when 80% of the money isn’t making you a return, it’s as though you’ve given the banks free money to lend out, or the clothing store free inventory they can sell!

To add insult to injury, you probably have debts that you’re paying interest on. On one hand you’re locking up that $5,000 at no return while paying out that same 4 to 20% with the other hand. What’s the best way for lenders to make sure you never pay extra or pay off your debts? It’s by keeping you broke. When you pay money into your RRSP you have a lot less money to pay on your debts. That’s a no-brainer since you don’t have an unlimited income. So the banks not only get free money to re-lend, they’re also making sure you won’t become debt free for a long time to come – and that locks in the profits in interest you’ll pay for a lot more years.

Someone please tell me how it makes any sense to save while you’re in debt. When you retire you’ll have some savings and an equal or larger amount of debt – makes no sense. Get out of debt and then you can save some serious money and really quickly – money you used to send to everybody else at 4 to 20% interest.

Since we’re going to run out of time, next week I’ll give you some investment tips, tricks, and alternatives to actually make your money grow instead of helping the banks to grow their $10 billion a year in profits.