Month: April 2019

Freeze your Credit Limit

Recently, I had a discussion with someone who was worried about credit card debt. For ease, Gentle Readers, I shall call this person Oscar.

Oscar’s niece owed over $10,000 on her credit card and Oscar was beside himself! It seemed that Oscar’s niece had been fleeced by an acquaintance who was not repaying the borrowed money and was in fact enraged with Oscar’s niece for not lending out even more money on her credit card.

While the whole situation was bothering Oscar a great deal, I learned that he was most troubled by the fact that the credit card company had increased his niece’s limit without verifying her salary. Oscar somehow believed that the credit card company had acted in an untoward manner! Oscar appeared to be under the impression that the credit card company was in a fiduciary relationship with his niece.

For my part, I was stunned that Oscar would be surprised by the credit card company’s behaviour.

Credit Card Companies make profits, not friends

In case you, Gentle Reader, believe credit card companies act in your best interest, please allow me to clarify the situation for you. Your credit card company has no duty to act in your best interest. Credit card companies are finance companies – they are in business to make money, not friends!!!

As profit-seeking entities, the credit card companies are not going to do anything to stop you from going into debt with their product. Please re-read my last sentence a few times before continuing. Let it sink in. To the credit card company, you are the goose and your feathers are money. They want to pluck you naked.

The credit card companies will increase your limit, charge you interest and fees, and harass you for payment if you don’t pay them back each month. They are finance companies. Their sole purpose is to earn profits for their shareholders by giving you credit so that you pay them back with interest and fees. That is the only service that they are offering you. To believe anything else is to naive and self-destructive. When you go into debt, they make more money.

More often that not, it makes sense for these companies to increase your credit limit beyond your ability to repay the full balance in a single payment cycle. They will do this at a drop of a pin because it’s a good business move for them. Doing so vastly increases the odds that you will be forced to carry a balance and thereby pay them interest at a double-digit percentage.

The credit limit increase is good for them. Conversely, the increase is bad for you. If you are using credit and not paying it off every single month, then you are living beyond your means!!! This situation is very bad because it means that you are living in debt and that you do not have any disposable income to put towards building your cash cushion.

Your Salary is Irrelevant to Any Increase

Credit card companies don’t check your salary before they increase your limit. When you apply for a credit card, you have to state your income. However, once you’ve been approved and issued a credit card, your salary need never be discussed again. The credit card companies don’t care if you earn $1500/month or $25,000/mth. They will continuously increase your limit as often as they can in the hopes that you eventually start paying them interest by carrying a balance from one month to the next.

My wisdom for you is this: your credit limit should never exceed the amount of money that you could repay in a single month. If you have an extra $1,000 per month after all your needs are met, then your credit limit should only be $1,000. You’ll be in a position to use your credit card up to its limit and still pay off the balance without incurring any interest. If you don’t have $10,000 in disposable income each month, then you don’t need a $10,000 limit.

A very smart friend of mine who introduced me to the Disposable Income Method of using credit cards. It’s ingenious and highly effective. I’m sure that the credit card companies hate it! If so, that’s means that you should love it and start implementing it immediately. Briefly, the Disposable Income Method requires you to set your credit card limit at whatever disposable income you have between paycheques. Every purchase can go through your card and you pay your credit card in full each time you get paid. Easy-peasy-lemon-squeezy!

Protect Yourself from Limit Increases

There are two ways to protect yourself from credit limit increases. The first method is to never have a credit card. This method is drastic and foolproof. In today’s world, it’s also quickly becoming unrealistic. Even I use credit cards on a regular basis. However, I never borrow more than I can repay when the bill comes due.

The other way to protect yourself from these increases is to phone your credit card company and to tell them the following: “Do not increase my credit limit without my express request to do so. I don’t need more credit than I have right now. I do not want my credit limit increased without my explicit permission. Please make a note of this conversation in your computer system.”

This conversation works – trust me. I do not want a 5-figure credit limit because I cannot repay a 5-figure debt in a single billing cycle. It has been several years since I’ve seen an increase in my credit card limit. By telling my credit card companies to freeze my credit card limit, I’ve eliminated some of the risk of carrying a credit card. I’ve pre-empted the possibility of spending more than I can repay.

So pick up the phone – call your credit card company – freeze your credit limit. Don’t feel bad or sad or guilty about doing so. Rest assured that the credit card companies will always be there to offer you more credit at very high interest rates. Fret not, Gentle Reader – you can always go into debt tomorrow!

Disposable Income is the First Step

The first step toward any building wealth for the next generation of your family is having disposable income. The more income you have, the faster you can reach this goals. When written out like this, it seems rather simple and obvious, doesn’t it?

I don’t mean to oversimplify the situation, nor do I mean to sound flip. I recognize that there are a great many jobs out there that pay just enough to let workers make it from one paycheque to the next. Workers don’t have the extra money from which to acquire disposable income. Guess what? Your employer doesn’t care. As callous as it sounds, your paycheque is an expense that your employer wants to minimize in order to maximize profit. It’s not personal – it’s business.

It’s your responsibility to figure out how to acquire the disposable income that you need to create intergenerational wealth for your family. Does that mean a second or third job? Would getting a roommate be the smart move? Do you need to upgrade your education to access better employment opportunities? Is there debt in your life that needs to be paid once and for all?

You know the details of your life, so you’re the only one who can answer these questions. Regardless of what you determine, you’ll still need some disposable income in order to achieve your financial goals. Living from one paycheque to the next will not give you the cash that you need to do anything other than think about the next payday.

The first people to teach me about creating a pool of disposable income were my parents. They were big believers in education. It was always preached to us kids that we would go to school and obtain a profession. Money from all baby bonus cheques – now the Child Tax Benefit – was set aside in our bank accounts until the fall, when it was invested in Canada Savings Bonds. The decision of my parents to invest in CSBs paid for a cumulative total of 14 years of post-secondary education for my sibling and I. Not too shabby for people who didn’t attend university themselves!

Getting a good education led to a well-paid career and that comfortable paycheque meant that I could accumulate disposable income. Post-university employment paid so much better than the jobs that I’d held as a cashier, caterer, and bank teller while going to school. I had relatively little debt when I finished school – roughly $15K – so I was able to pay it off quickly. Once that was finished, I had more disposable income because I didn’t have to make student loan payments anymore. When my car loan was gone, the same thing happened – my disposable income shot up. And when the granddaddy of debts was finally eliminated, my former mortgage payments exponentially boosted the amount of disposable income available to me every two weeks.

The first step was accomplished – I had disposable income to invest!

So what was the next step?

Great question! For me, the next step was deciding that I wasn’t going to waste my disposable income on stupid stuff. I chose to pay attention to the people who I wanted to emulate financially. I saw that people who had money were using it to help their children get established in their adult lives. At the time, I didn’t have the right terminology to describe my observations. Thankfully, my lexicon has since come a long way.

Initially, I looked around at my friends, who were all starting their families & paying down mortgages. We were earning similar amounts but their priorities meant that their spending patterns were extremely different than mine. Once debt-free, my financial circumstances aligned far more closely with those of my parents’ friends and those of my friends’ parents.

Although I didn’t know the term at the time, I observed many, many examples of intergenerational wealth in action. I realized that some of my friends had parents who had assisted them with major home renovations or down payments. At least one of my friends had her student loans paid off by her parents. Three of my cousins were lucky enough to have each received $10,000 from their parents as down payments on their first homes. And I also noted that my parents’ friends were assisting their kids in similar ways, by loaning them down payments to buy businesses or their first homes.

These were gifts that went beyond the tradition of paying for a wedding. The parents whom I was observing were using their wealth to improve their children’s lives.

Parents have always tried to assist their children, but my parents had never benefitted from such monetary transfers. My four grandparents had produced 21 children between them. Understandably, neither set was really in a position to gift each of their children down payments, pay their students loans, or loan them money to buy established businesses. My grandparents lived from one paycheque to the next. Their children – my parents, aunts, and uncles – were on their own to figure out financial stuff once they left the nest.

So what are my friends doing now? Many of them have kids entering or firmly ensconced in adolescence, so I’ve had a bit of time to see what kind of choices they’ve made as parents. Most of my friends have a Registered Education Savings Plan (RESP) for their children. Some of my friends have businesses that can be passed down to their children. Others of my friends have invested in rental properties. By the time their kids are grown, the mortgages will be paid and the properties can become cash-cows for the kids. Alternatively, the properties can be sold and the money invested elsewhere.

What I’m observing is that nearly all of my friends are taking “the next step” by using their disposable income to create intergenerational wealth. Very few of my friends are living from one paycheque to the next. While they all complain about the cost of their children’s various activities, not a single one of them is at risk of losing their house or unable to buy groceries for their families. All of my friends are able to meet the necessities for their families, and there is still money leftover for children’s extracurriculars, summer camps, tutoring, etc…

That “leftover money” is the disposable income that my friends have. Once their children are adults, I’m certain that my friends will use their disposable income to assist their children financially. My friends will help with down payments on first homes and businesses. They will pay for schooling, and they will set up RESPs for their grandchildren. My friends’ children will benefit from intergenerational transfers of wealth.

You don’t need to be in a couple nor do you need to be a parent in order to create intergenerational wealth. Two people near and dear to my heart are women have never married, nor are they mothers. However, they are aunties to some pretty spectacular kids. These two women have built wealth for themselves, and will presumably leave their estates to their nieces and nephews. These are smart women who understand the power of investing. They appreciate that the seeds they planted yesterday – via very smart real estate decisions – will bear fruit for the next generation.

What are you doing today to create intergenerational wealth in your family?

Prepare for Burnout

Do you want to know a secret about burnout? Here it is… almost everyone keeps burnout a secret from everyone else.

I’ve attended many graduation ceremonies in my time, my own and those of loved ones. I’ve also had various mentors over the years. While they weren’t all great, they all taught me something valuable. And I’ve also had the opportunity to read many, many books & blogs about career-planning.

Here’s the secret… Not a single one of those sources has ever told me that burnout is a thing, and that I might one day face it. Not a single one of my mentors gave any hint that they were dealing with or had ever dealt with burnout – not a single one of them said a word about it. There was never a hint that decades in a given career could lead to anything other than stability, satisfaction, and challenging work.

It’s astonishing! When you think of how many people you might know who just go through the motions, it’s really quite remarkable that there’s an almost coordinated collusion by those-who-have-gone-before to never tell those-who-are-coming along that they won’t always be happy, engaged, or fulfilled by their chosen career.

Quick! Do you love your job?

Whether the answer is yes or no, you should save money now in case you get burned out at work at some point during your working life. In my humble opinion, people don’t talk about the possibility of burnout when planning their careers. If you’re lucky, you start out eager and happy and engaged. And if you’re very, very, very lucky, you’ll continue to be enthusiastically engaged with your career for a long as you have it.

Not all of us are so fortunate. There are people who simply get burned out and simply. Can’t. Do. It. Anymore! They can’t drag themselves into work another day. If you were to ask them to be honest, they would say that they feel like their lives are being wasted as they grind it out. In short, they hate the lives that they’re living. 

Of course, maybe it’s not your job that’s causing your burnout. Maybe you have obligations to extended family that are stressful. Perhaps you’re having trouble getting out of debt. There could be an undiagnosed physical illness. Whatever the reason, the end result is burnout as you try to handle everything that’s on your plate. The ugly reality is that burnout drains your ability to feel joy, to laugh with abandon, to experience that joie de vivre that makes life so much more enjoyable.

If this is you, then know that this is not a good way to live the only life that you have!

The antidote to your burnout might be a break from work. Definitely speak to a medical professional for a proper diagnosis. At the very least, a doctor can figure out if what you’re feeling is caused by something other than your job. And your doctor is the one who can put you on stress leave if that’s what you need to recover from the horrible feeling of burnout. 

Build Your Stash

Trust me when I say that the bills won’t stop during your recovery period!!!

What do you mean, Blue Lobster?

Money in the bank and cash flow from investments gives you some options when you’re facing burnout. Instead of being miserable and continuing to feel the bleakness that penetrates to the very depth of one’s soul, you have money so that means you can quit if you need too. You have the financial wherewithal to leave employment situations which make you want to cry.

Having a nice, fat cash cushion alleviates any concerns about how to pay for life without a job. Think of your recovery as a mini-retirement, or a little sabbatical. There might not be any income coming into your household, but the cash cushion means that you don’t have to worry about that. You can focus on doing what you need to do in order to feel some joy in your life again.

It would be unfair if I didn’t recognize that there are some great employers out there who recognize that burnout is a reality. If you have burnout and work for such an employer, then you’re quite lucky despite how you feel about your job. If you’re considered a good employee, then you may be able to get time off from you employer to recuperate. In other words, good employees may be offered a sabbatical. Great! Kudos to employers who recognize the benefits of helping their best employees to deal with burnout. However, sabbaticals need to be funded with real money.

And let’s be realistic – this is a benefit that is very rare. Be brutally honest with yourself. Would your current employer give you months off to recover from burnout?

Hopefully, you’re reading this when you don’t have burnout. And if the deities are kind, you will never experience this horrible condition. But as the Wise Ones know, hope is not a plan. Take steps today to start preparing financially for a time when you just might need to take more than a week or two of vacation to re-charge your batteries.

No one likes to think about bad things happening. Sadly, this preference won’t stop burnout from occurring. Be proactive! Take steps now to financially cushion yourself just in case you need to walk away from your job to protect your mental health.