Tag Archives: paying off debt

Spend $45 to Save $36,000

Two weeks ago, I received an email from a listener in Kelowna asking for some financial feedback. The email had enough in it to fill an hour or more, but here are the highlights:

This middle-aged couple has done really well in their investments. They have significant RRSPs and contribute 5% to their pension plan. They do have an RRSP loan at a good rate – and I won’t fuss about that.

They live within their means, no extravagant spending, small mortgage at a great rate, and an income of over $100,000.

On the debt side, it’s a different story. When they bought the Money Tools book at Mosaic, they immediately found $12,000 savings! Pretty good for a $20 investment! I keep saying: You go to almost any page and you’ll find a way to save money in whatever area! In their case, they have a line of credit that’s insured with life and disability. That’s one of THE biggest ripoffs in the financial field. The bank’s profits are 50 to 60%. Never get your insurance from the bank – ever. He immediately called to cancel it, but was on hold for 1 1/2 hours and never did talk to someone. Well, don’t bother calling. Write a three sentence letter that you want it cancelled as of today and deliver it to your branch. Banks can have a way of ignoring a call, claiming they never received it, etc. in order to protect their profit. In writing and delivered gets it done.

Their line of credit has been around since finances weren’t so good in the 1980s. It’s around $40,000 at a rate of over six percent! The rate is always prime plus something. That rate may have been OK when things weren’t so good, today it’s a massive overcharge. His credit score is over 780! He’s in the top 10% most credit worthy people in the country and ought to pay prime! 3% over for the last 10 years and on-track to only pay it off in another decade is over $25,000 in extra interest! All he did was go to equifax and pull up his credit score! When rates go up, lenders move up your rate. When your credit improves, they’re not voluntarily passing on a lower rate! You have to know your score and go ask – or demand it or fire your bank.

In the case of this couple, I wouldn’t move the credit line, but just get from the 10-year plan to one that pays it off pretty easily by Christmas this year. They have $20,000 in savings. Read the step up debt repayment section: First pay off your debts, then start saving. In their case, they should keep $5,000 for emergencies, dump $15,000 onto the credit line and pay $2,000 a month to get it done. It will take another six months to pay off the RRSP loan, and by June next year, they’d be debt free – instead of the 10-year payment plan they are on.

With a great income and getting really mad and motivated, they would be

$25,000 insurance cancellations for the 10 years the line of credit would take to pay off on their current plan

or: $25,000 (roughly) to pay off the line of credit 10 years sooner

$11,000 paying off the RRSP loan (the interest isn’t tax deductible) nine years sooner (by next summer)

That’s $36,000 of savings by spending $20 on the book and $25 on pulling their credit score. That’s a pretty good return!!

Then, next June to December, they can save the $500 they were paying on the RRSP, the $2,000 they were paying on the line of credit for six months or a total of $15,000 by just re-directing what they had been paying on their debts!

Seven Things the Middle Class Can’t Afford Anymore

This was an article originally published in USA Today last week. Two are medical and dental that don’t apply very much here in Canada, but how many of these are accurate, or apply to you and me in the middle class?

Vacations: Most middle-class families just can’t afford an expensive vacation without sacrificing something else. A Statista survey found that 54% of people had to sacrifice another big purchase to be able to afford a vacation. We’re not talking about a camping trip here, but anything that involves an airline flight is expensive. Add meals and hotels and you’re over $3,000 to $4,000 pretty quickly.

A new vehicle: With an average price over $32,000 it’s just not something most people can afford – either because there’s no chance they have that kind of money saved, or because they couldn’t afford the payments no matter how long the term is stretched.

To pay off debts: Debt loads are rising way faster than incomes. So every  month, finances get worse and not better. Living pretty close to spending every dime of income on bills, necessities, and minimum payments makes it really difficult to make a dent in their debts. That makes it more critical not to get into debt in the first place. Because,  once you’re in, you’re trapped for decades. How do families get into debt in the first place? Vehicles they can’t afford, houses with little down payment and high monthly payments and that subconscious refusal to acknowledge they can’t afford something.

Emergency savings: We’ve talked about this before. Basic emergency savings are one week of net pay. Then pay off your debts smallest to largest and step three is to have a three-month emergency fund in place. But almost 50% of people couldn’t miss one week of pay. Why? See number one two and three.

Retirement savings: When you’re barely able to keep your head above water today, it leaves nothing to save for tomorrow. That’s just the reality of what’s coming in versus going out. That’s why you need to pay yourself first. If it comes off your pay or out of your chequing account every month you can’t spend what you don’t have. It’s pretty much the only way to save for retirement. In a recent study, 17% of Canadians plan to use the proceeds of their house sale to fund retirement….but don’t they need to live somewhere? After all, you can’t eat your house! That’s a terrible strategy, right up there with winning the lottery to fund retirement.

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

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!

Your E-mail Segment

Here are a couple of e-mails from listeners. Chance are if one person e mails, there are lots of others who have the same questions:

Hi George: We are going on vacation to Mexico. The question is what do you suggest as far as taking money? I have asked lots of people and everyone has a different opinion. Some people say use your debit card (that sort of scares me aside from charges), some say Visa/MC, others say strictly US cash or take Canadian and exchange it down. I am confused…

This isn’t worth your brain power. I only answer questions as to what I would do, and in this case, you’re dealing with a pretty amount of money. You’re not buying a house down there, so we’re talking about the exchange on about $400 or $500. Whatever it is, it’s a $5 to $7 decision. I don’t pull out my debit card – that’s way too risky, unless it’s at a bank ATM. Not many places want our crappy Canadian dollar, and it’s a giant pain to find a bank to exchange it at. In the US, by the way, most banks now won’t even do an exchange unless you are a customer. They can’t recognize counterfeit foreign money and don’t give a hoot about non-bank clients anyway.

Take what you think in US cash. If you’ve got a credit union MasterCard, use it, because it has the least foreign exchange rip off, most others are 2.5% or more, there’s a chart in the back of the It’s Your Money book on everything credit card related, or you can call the 800 number on the back of your credit card and ask.

Hello George: In the It’s Your Money book, you talk about getting debt free by paying off the smallest debt to the largest debt. Wouldn’t it be more logical to pay the highest interest rates first?

Yes and no. You’re presuming that getting into debt and paying it off are logical decisions and three-quarters of it isn’t logical – it’s emotional. Is it logical to charge something on a 20% credit card? Is it logical to take a car loan over 7 years when you’ll always owe more than it’s worth? Is it logical to take a 6-months don’t pay that reverts to 29% right back to the get-go? No way.

Just like getting a car unstuck in the snow you need to get traction. Traction and extra cash comes from paying off the smallest bill. It’ll take a month or two, tops and frees up the payment that was going on that bill, as well as creating a huge self-confidence feeling that one is gone forever.

Rolling that money into the next smallest bill makes it go twice as fast, and so on. In the book is an example of $25,000 debt and how quickly it’ll get paid off with some huge interest savings. Remember that interest isn’t a rate thing – it’s interest dollars which we can control.

Besides, when it’s a single-minded focus to get rid of your debt it’ll happen really quickly. So the rate doesn’t matter that much when it’s only being paid for a year or so.