Author: Blue Lobster

Holidays and your Wallet

It’s the holiday season again! Between Thanksgiving and Christmas, people will be bombarded with advertising encouraging them to buy as much as they possibly can to prove the depth of their love for the special ones in their lives.

Do you want your child to be happy? Buy a toy! Do you want your spouse to be happy? Buy a car! Do you want your parent to be happy? Buy them a trip! Do you want to be happy? Open your wallet and buy!

For the most part, this is a stupid method for building the bonds of love and kinship. Gifts of stuff don’t make for great relationships. Gifts of time, gifts of effort – these are the the seeds of strong and loving connections to others. Luckily, these kinds of gifts do not need to be expensive or extravagant.

In my family, there has been a debate for the past few years about how to do the gift exchange. My mother is adamantly in favour of receiving gifts, and she is quite willing to give gifts too! My brother is the complete opposite. He’s of the view that none of us needs anything else so we shouldn’t be participating in the shopping frenzy of Christmas. A compromise was reached – gifts will be exchanged but there will be a limit of $20. It’s not  a perfect solution, but we’ll see if it works for us. My sister-in-law lifted a burden from my plate recently when she asked me for a tin of cookies for her Christmas present. I was so happy because her request eliminates atleast one trip to the mall! As for the extended family who celebrates the day with us… I will be buying something for each of them that I know they will appreciate and I will be sticking to the limit of $20.

One of my joys at this time of year is baking Christmas cookies: gingersnaps, shortbread, magic cookie bars, haystacks, peanut butter blossoms, thumbprint cookies!  

These are my family’s Christmas cookies, not to be confused with my other cookies that are made throughout the year. They are special because no one else bakes cookies anymore and I only make them at Christmas-time. I generally give away 7-10 tins of baking per year, and I start baking 4 weeks before the Big Day! Making an extra tin of cookies for my family is a simple thing that will make everyone happy.

Having the shortbread that our mother used to make for us when we were small will bring back happy childhood memories for my brother. The beauty of memories is that they need not be purchased with cash, stored, maintained, dusted, or otherwise handled. They are free, but they can still be powerful and wonderful and thoroughly enjoyed. This is the effect that people are seeking to create when buying gifts at the store, isn’t it?

Cookies are a gift to my mother too. She can enjoy them, without having to do all the work that they entail. My mother isn’t as young as she once was, so marathon baking is no longer an option for her. Yet, she still loves the assortment of treats that I bake for Christmas. Enjoying a few cookies will put a smile on her face which is what I want to see on Christmas day. It’s a win-win for both of us.

The holidays need not deplete your bank account, nor flatten your wallet. Do not let the AdMan and the Creditor tell you that joy can only be bought in a store. There are ways to create wonderful memories without working your way towards bankruptcy. The holiday season is already packed with so many over-the-top expectations about how everything “should be” so give yourself a break and relieve some of the financial pressure. Figure out the two or three things that you love most, focus on those, and build the relationships you want with those whom you love best. Trust me – that is definitely a gift to yourself that cannot be bought in a store! 

Financial Vulnerability

You are financially vulnerable.

 

Don’t feel too bad. Most of us are.

 

A few weeks back, I watched an interview with Elizabeth White where she talks about faking normal. In short, Ms. White is very well-educated, had a network of contacts, worked for an international organization, took an entrepreneurial risk, got caught by the 2008 recession, and tumbled down the income ladder. She had significant savings and she “did everything right” but she still wound up financially vulnerable. She has since written a book documenting her experience and the experiences of many others who are in the same boat. It will be released in 2019.

 

After watching Ms. White’s interview, I took a hard look at my own life. I’m roughly 10 years younger than Ms. White, but I still have my employment and I’m one of the Fortunate Few who can expect to receive a pension when I retire…unless my pension is bankrupt and there won’t be any money to pay me when it’s my time to collect.  (This is one of my personal financial nightmares.) So I’m doing what I think will save me from the possibility of my promised pension disappearing – I’m setting aside a large chunk of my paycheque into dividend paying investments. I let those dividends rollover each month, in the hope that my monthly dividend cheque will be enough to pay my retirement expenses if it has to. Check out how I’m doing this, if you’re interested. And while I’m saving, I’m working damn hard to stay out of debt. I’m also developing the habit of only spending money on the things that really matter to me: time with family and friends, travel, eating good food. Expenditures on anything else need to be justified because those things aren’t my priorities. It doesn’t mean that the expenditure isn’t eventually made. It simply means that there’d better be a good justification before my money leaves my wallet.

 

I feel like I’m doing okay, but I still question if I’ll continue to be okay if I lose my career in my 50s.

 

Ageism. It’s real and it’s pervasive. Sadly, it’s rarely on anyone’s radar until such time as they’re a victim of it. Those in their 20s and 30s are busy starting their careers, or simply finding jobs that allow them to pay for their necessities. The fortunate ones who have found employment most likely aren’t thinking about whether they will be turfed for having wrinkles when they hit their 50s and 60s. Those in their 40s are building families and careers, starting new businesses, or exploring the world. They too likely aren’t considering whether it’ll be easy for them to return to the world of paid employment should they need to.

 

Nope. For many who are trying to find work in their 50s and 60s, the reality doesn’t sink in until they cannot – for love or money – land a position no matter how hard they try. In the meantime, they still have to survive. There are still bills to be paid, mortgages to be serviced, and, most likely, children to raise or educate. As we all know, the expenses of life don’t stop just because someone has lost their job. Without an income, most people have little to no choice other than to dip into their savings while they’re receiving unemployment insurance payments. Once those payments stop, then there is no “choice” about it – savings must fund life’s expenses until another income is found.

 

And this is where the vulnerability is exposed. The vast majority of us do not have sufficient savings to survive for 30 or 40 years without an income. We have been conditioned to believe that we will always have and, if necessary, will always find another source of income that will be enough to keep us afloat. This hasn’t been true for a very long time, particularly not for those in their 50s and 60s. It’s a vicious and heart-breaking reality that employers are not financially incentivized to pay for talent, experience, and wisdom even though those very things are expected of employees before they are terminated.

 

Do I have the solution to this problem? No, I would never make such a boast.

 

However, I would strenuously encourage you to minimize your vulnerability while you can. I would suggest that you get out of debt as soon as possible and that you save as much of your income as you can while still enjoying the present. Figure out what your priorities are, spend your money on those, and ignore all other exhortations to spend your precious income on things that don’t matter to you. Whatever isn’t spent on your priorities should be set aside for long-term investing, paying off your debts, and building your emergency fund. It should not have escaped your notice that saving money should definitely be one of your most important priorities.

 

The more money your household makes, the easier it should for you to hit savings targets of 20%-50%. I harbour no illusion that lower income households are in a position to save great swaths of their income. Those of you with a healthy disposable income need to understand that there is no guarantee that you will always have employment that so richly lines your pocket. No one knows what tomorrow will bring. All you can do is look at the money you have today and figure out a way to not spend all of it. There’s no shame in saving some of today’s money for tomorrow’s needs.

 

If for some reason you lose your income in your 50s or 60s, your ability to survive until the next job – or until you can start collecting CPP – is going to depend on how much money you’ve committed to spend each month. Get out of debt. Have an investment portfolio that kicks off some dividends and capital gains, which are automatically re-invested until you need to rely on them. Establish a savings program that allows you to invest a good chunk of your income until you retire. Limit your spending to things that bring you a deep sense of joy and satisfaction. If it won’t make you happy, then don’t buy it.

Rising Mortgage Rates & the Stress Test

Recently, people near and dear to my heart bought a new home. I was more than thrilled for them since their new place is lovely and will be a perfect nest for their growing family. And as they disclosed their numbers to me, I started to think about the impact that the rising mortgage rates will have on them when they go to renew their mortgage in 5 years. I’m fervently hoping that they are not underwater on their mortgage when it comes time for them to renew. The new reality in Canada is that if homeowners are underwater on their mortgages at renewal time, then there is precious little incentive for their lender to give them a preferential renewal rate.

 

What does it mean to be underwater on your mortgage?

 

You are underwater on your mortgage if the mortgage debt outstanding is higher than the market value of your home.

 

For example, if you owe $250,000 on your mortgage and the market value of your home is $200,000, then your mortgage is underwater by $50,000.

 

What is the stress test?

 

The Canadian government introduced a mortgage stress test to assist borrowers to determine if they could afford their mortgage if rates were to increase 2% above the posted 5-year rate. If the posted rate is 3.49%, then the person seeking a mortgage has to demonstrate she can still service the mortgage at rate of 5.49% (= 3.49% + 2%).

 

If you want to read the nitty-gritty details, here is the link as of the time of writing: How the Stress Test Works.

 

The short and sweet of it is this: if you cannot show that your finances could not support a mortgage at a rate 2% higher than the bank’s posted rate, then you cannot get the mortgage amount that you want.

 

Why does it matter if you’re underwater on your mortgage?

 

Being underwater matters when it comes time to renew your mortgage. Banks and other mortgage lenders are not keen to renew mortgages where the underlying asset, i.e. the property, is worth less than the debt. They reasonably and rightly understand that there is less incentive for a homeowner to pay the full price of the debt ($250,000) for something that is worth less than the debt ($200,000).

 

However, let’s assume that you want to stay in your home even though you’re underwater on the mortgage. The lender may not offer you the best rate since there’s less chance that you’re going to switch to another mortgage holder. Before the lender releases title on your property to another lender, you as the homeowner have to pay off the mortgage. But you’re underwater by $50,000 (= $250,000 – $200,000).

 

Another lender is not going to give you a mortgage of $250,000 on a property that is worth $200,000.  Secondly, lenders want homeowner to have some skin in the game so they generally want to see homeowners put down 20% of the value of the home. In this case, the next lender would only advance a mortgage of $160,000 (= 20% x $200,000).

 

As the homeowner, you would have to come up with $90,000 to get a mortgage from another lender. That $90,000 would cover the difference between the debt owed to your current lender, again $250,000, and the amount of money that your next lender would give you, $160,000, on your home which now has a market value of $200,000. Another way of looking at is that you’d have to come up with $50,000 to pay off your old lender and another $40,000 as a 20% equity stake in order to get financing from your new lender.

 

If your current lender is aware that you don’t have $90,000 kicking around, then your current lender has no incentive to offer you a rate that is lower than the posted 5-month rate. In other words, they’ve got you by the short and curlies. Why on Earth would your lender offer you a lower rate if they don’t have to? The only reason that your lender offers you “their best rate” is because they don’t want you to get a mortgage with one of their competitors.  If there’s no chance of you leaving, due to that pesky problem of not having an extra $90,000 lying around, then your lender has no motive to charge you less interest on your mortgage.

 

The second reason to not be underwater on your mortgage is that the new lender is going to subject you to the stress test. Not only do you have to come up with the down payment amount of $40,000 and another $50,000 to satisfy the deficiency between your mortgage debt and the market value of your home, you have to demonstrate to the new lender that you can afford the new $160,000 mortgage at rate that is 2% higher than the posted rate. If you can’t pass the stress test, then the new lender is not going to issue you a mortgage and you’re stuck with your current lender.

 

How to obtain good options for renewal time

 

You want to be in the position of having good options come renewal time. When it comes to mortgages, one of those good options is knowing that you can switch lenders if you need to. Once your current lender is convinced that you have the ability to take your mortgage business to their competitor, they will again be incentivized to give you a discounted mortgage rate, which is simply a mortgage rate that is less than the posted one.

 

In short, the discounted rate is a sweetener that is offered so that you have a good reason to stay with them. They know that it is easier to keep a current customer than it is to find a new one.

 

The main way for you to become a customer that they want to keep is by ensuring that you are making all of your mortgage payments on time and that your mortgage debt remains lower than the market value of your home. You cannot control what the residential market does, but you can control how much money you put towards your mortgage every time you make a payment. Using mortgage prepayment options means that you are eliminating your mortgage debt as quickly as possible.

 

I firmly predict that as mortgage rates continue to rise over the next 5 years, there will be many people who will not be in a position to move their mortgage to another lender due to being underwater on their mortgages, becuase they cannot pass the stress test, or both. The end result will be that these mortgage holders will not be offered discounted mortgage rates by their current lenders. In turn, this means that they will be required to make higher mortgage payments after renewal or else face foreclosure by the bank.

 

Do what you can right now to pay down your mortgage as quickly as possible so that you maintain the desirable position of not being underwater on your mortgage and ensuring that you will be offered the option of being offered a discounted mortgage rate when it comes time to renew your mortgage.

Bi-Weekly Payments vs. Semi-Monthly Paycheques

One of the easiest ways to cut down the amortization of a mortgage is by making bi-weekly payments. A bi-weekly payment is one where, every two weeks, your mortgage lender makes a withdrawal from your bank account for the purpose of paying your mortgage.

 

If you’re paid on a bi-weekly schedule, then there’s absolutely no issue with having your mortgage payment come out of your bank account the day after you’re paid. Money comes in – mortgage goes out. Easy-peasy for all concerned!

 

However, there are those folks who don’t get paid on a bi-weekly schedule. They might be paid monthly, with a mid-month advance. Perhaps they receive a mid-month advance and the bulk of their paycheque is paid at month end. For these people, a  bi-weekly payment plan has to be structured a little bit differently so that they can still save interest on their mortgage debt by decreasing the amortization period.

 

1. Open a second chequing account at Simplii or Tangerine. This will become your mortgage account. 

 

These are online bank accounts that are free.

 

If you are paid monthly and that you receive a mid-month advance, (or even if you’re only paid once a month), arrange to have your mortgage payment deducted from your mortgage account instead of from your current bank account.

 

Since there are 52 weeks in a year, the bi-weekly plan means that 26 payments are made to your mortgage every year. There will be two months in the year where the mortgage payment will be debited three times in the month. However, you will not be paid three time in that month since your employer only pays you twice a month.

 

You’ll need the mortgage account so that your current account isn’t debited unexpectedly, which will mess up the rest of your finances. At this point, you may be wondering how your finances might get messed up with the bi-weekly mortgage payment.

 

Bi-weekly mortgage payments will not always coincide with the days on which you get paid. If you decide to implement my suggestion, the mortgage account will always have a buffer of 2 (hopefully more!) mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account from your mid-month advance and from the remainder of your monthly paycheque, the mortgage balance will be paid down every two weeks without fail because your lender will simply withdraw your mortgage payment from your mortgage account.

 

Do not use your mortgage account for anything else, except your annual property taxes and house insurance. Set up an automatic transfer from your chequing account to your mortgage account to cover the costs of taxes and insurance. This way, the money’s in place when you need it and you won’t have to touch the 2-month buffer of mortgage payments.

 

2. Do not use the lender’s bank account unless it’s free for life.

 

If you’re getting a mortgabe through a bank instead of a mortgage company, the bank will want you to use their bank products. They might even tempt you with one or two years of a free chequing account. My suggestion is to not take their offer. After the first year or two of free banking, you’ll have to go back to paying banking fees unless you’re wiling have $1500 or more held ransom for the privilege of free banking. What I call a ransom is what banks calls a “minimum monthly balance.”

 

I strongly suggest opening your mortgage account at one of the free online banks, Simplii or Tangerine. You don’t have to pay any bank service fees for any of their accounts, which means you don’t have to keep a minimum balance in your accounts to avoid bank fees. (I am not getting paid for this recommendation.)

 

And if you’re already banking with Simplii or Tangerine, then so much the better!

 

3. Figure out how much your mortgage payments will be.

 

You can figure out your anticipated mortgage payment with an online calculator. I say “anticipated” because the actual mortgage payment amount will be finalized on the day that you sign your mortgage documents.

 

BMO has a pretty useful calculator: https://www.bmo.com/main/personal/mortgages/calculators/payment/  (Again, I’m not receiving any compensation from BMO for recommending this calculator.)

 

When using this calculator, be sure to choose the option for determining the accelerated bi-weekly mortgage payment amount. This bi-weekly amount will come out of your mortgage account every 2 weeks once your mortgage is up and running. Take that bi-weekly amount and multiply it by 26, to get the annual total amount of your mortgage payment. Then divide the annual total amount by 24, since you receive your paycheque in 24 instalments over the year. This new amount, i.e. 1/24th of the annual total amount, is the amount that you should be automatically transferring to your mortgage account each time you get paid.

 

You can also pro-rate the transfers if it’s easier on your budget. If you receive 1/3 of your monthly pay at mid-month, the transfer 1/3 of the new amount on the 15th of the month. The remaining 2/3 of the new amount can be transferred at month-end or at the beginning of the month, whenever you get the bulk of your paycheque.

 

The sooner you start automatically transferring money to your mortgage account prior to taking possession of your new home, the bigger a cash cushion you’ll create.

 

Ideally, you start funding your mortgage account via automatic transfers from your current bank account before you even get your mortgage.

 

Why? It’s best to have a buffer of atleast 2 mortgage payments sitting in your mortgage account before the mortgage starts. Taking this step will allow you to adjust the rest of your budget to accommodate your mortgage payments. You’ll have had, at a minimum, 2-3 months to adjust to the impact that your mortgage payments will have on the rest of your financial goals.

 

4. The reason for this suggestion.

 

Why am I suggesting this method of payment? And why am I suggesting that you start now?

 

Again, it’s because your bi-weekly mortgage payments will not always coincide with the days on which you get paid. The mortgage account will always have a buffer of 2, or more, mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account, the mortgage balance will be paid down every two weeks without fail.

 

I want you to pay the least amount of interest possible on your mortgage. To do that, you need to be paying down your mortgage every two weeks. (There’s also a weekly option but I don’t really like that one.) Every time you make a mortgage payment, you’re reducing the principal balance of your mortgage. Every dollar of principal that is paid off is a dollar on which you will never again pay interest.

 

Shaving years off your mortgage means less interest going to the bank because that money stays in your pocket!

Money is a Tool

A little while back, I read something online that said that some older women believe that they need not learn about money because it falls into the realm of things-that-men-know-about. These women believe that men are the only ones who need to understand money and that they will be fine so long as they have a man around.

 

I was literally blown away and couldn’t get to my computer fast enough to start writing this post! This is one of the most ridiculous concepts I have ever heard in my life. I had to ask myself – Why is this idea so foreign to me? Why am I having such a visceral negative reaction to this worldview?

 

The answer is as follows – money is a tool, much like a knife. If you’re smart enough to learn how to use a knife, then you’re smart enough to learn how to use money. A tool is a tool and its functionality doesn’t change based on the gender of the person who wields it. A butter knife is a butter knife whether held in the hand of a woman or a man. Similarly, money’s functionality doesn’t change – it purchases options for both women and men. Body parts have absolutely nothing to do with it!!!

 

I realize that many households run on a division of labor, and perhaps handling money is one of those items that falls along gender lines in some households. However, a division of labor is not the same thing as saying that one person cannot learn how to use a tool simply because their private bits are on the inside while someone else’s bits hang on the outside.

 

All people come into this world naked – no one is born knowing how to use any of the tools that have been invented by everyone who came before us. Adults don’t expect babies to know how to do very much beyond cry, poop, and sleep. For the first few months, we get a pass so long as we’re doing these things on a sufficiently normal schedule. However, there does come a point where we have to start learning how to use the tools that are available to us so that we can be fully functioning adults.

 

Money is one of those tools. My fervent hope is that the idea that only men need to know how to use this tool is one that will be extinguished forever. Every one needs to know how to use this tool in order to live a life that is truly reflective of their personal goals, dreams, desires and priorities. Parents teach all children how to use tools that are necessary to their offspring’s survival because parents want what is best for their children. It is perplexing to me that parents would purposefully limit their daughters’ armamentarium of tools by failing to teach them about money, which is so vitally important to achieving the financial goals that their daughters may have for their futures. The more money there is, the more options there are.

 

(And while we’re on the subject, washing machines and clothes dryers are tools too. There’s nothing intrinsically female about these machines. Both will start and operate properly whether they are loaded and unloaded by a man or by a woman. Yet it never ceases to amaze me how many older men – with wives or without – never consider doing their own laundry.)

 

Thankfully, dinosaur-esque attitudes about what topics are suitable for men and what topics are suitable for women are dying. Money is a tool that benefits all people because it affords them the ability to exercise financial agency over their own lives. Knowing how to use money as a tool is vitally important for everyone, regardless of their gender. Trusting someone else to take care of you for your whole life is a huge gamble. Even if you’re married to the most loyal, ethical and wonderful person in the whole world, someone who could never dream of harming a single hair on your head, there’s no guarantee that this magnificent person will always be around. There are things such as accidents, kidnappings, unemployment, comas, and death which can all work to prevent Magnificent Person from taking care of you every single day for the rest of your life.

 

This is why it’s imperative that you learn how to operate the tool called money. You have to know more than how to pay the bills. You need to know that part of every dollar that crosses your palm needs to be set aside in an emergency fund, and that your emergency fund needs to be worth atleast 3 months of income. You need to know that paying interest on credit card debt is the equivalent of setting money on fire. You need to know that it’s generally best to pay off your home before you retire so that you can rely on its equity if you need to pay for nursing home care. You need to know that from the smallest acorns do the mighty oaks grow – the same is true of your money. Steady contributions to your investment portfolio will yield a nice, fat cash cushion for you in the future.

 

There are many lessons about money that take a lifetime to learn, and you bear a responsibility to yourself and to your loved ones to learn how to manage the money that comes into your life. And it’s also your duty to teach the young people in your life how to properly manage their money, how to stay out of debt, and how to invest for their futures.

 

So many of us in the FIRE-sphere think about the financial independence that money will bring to us. Some of us dream about retiring early. However, there’s insufficient emphasis on the nuts and bolts of money that are just as vitally important to those who don’t live and breathe FIRE. Money is a tool – everyone needs to know how to use this tool so that they can pursue their own dreams and goals.

 

 

There’s no need to pay interest on your credit cards!

I want you to know that I use credit cards. Frankly, I love the convenience of them. When I don’t have time to run to the bank machine to grab some cash, it’s very comforting to know that I can slide my credit card out of my wallet and still buy whatever it that I need at the moment. Credit cards are a seductively easy way to replace cash when it comes to paying for everything legally available under the sun. There’s no annual fee to worry about and I even earn rewards for using my card. The cherry on my sundae is that I earn points towards free groceries – score!

 

The only negative that I’ve been able to associate with credit cards is the manner in which they facilitate debt problems. In other words, they make it ever-so-easy to get caught in the debt trap. See, when the bank issues you a credit card, the bank sets a limit on how much you can spend. And when you get close to that limit, the banks will increase limit so that you can continue to buy-buy-buy. From what I’ve observed with my own credit cards and the credit lines of others in my circle, the limit that is assigned to your card is completely and utterly divorced from the amount of disposable income that you have each month with which to pay off your credit card balance when the bill comes due. I used to have a $9,000 limit on one of my cards! I can assure you that I do have $9,000 each month that can be put towards my credit card.

 

Credit cards are here to stay. Let’s face it – society is not moving en masse back towards cash. There are the diehards who only use cash, and their numbers are dwindling. The last time I was at the airport, I noticed that passengers must use a credit or debit card to pay for their baggage fees. Excuse me? How is it possible that the words “Legal Tender” don’t apply at the airport?

 

The cornucopia of credit cards is not going to disappear anytime soon, but that doesn’t mean that you have to pay interest for the privilege of using them. Use your credit card as much as you want, but ensure that it is paid off in full by the due date. There are multiple ways to do this.

 

There’s the Traditional Method: the statement arrives, you see the balance, you pay the balance in full. This method is old-school. It’s incredibly effective. I don’t know of a single person who has been charged a penny in interest by paying their credit card balance in full before the due date. The banks lend you money via your credit card, then they ask to be re-paid if you use it. When the bill comes in, you repay the bank their money. Everyone’s happy and you get to do it again the following month. The Traditional Method works like a charm.

 

There’s my Obsessive Compulsive Method. I use my card. I check my account online. When the charge is posted, then I know that I will get the points for my purchase. I then go to my bank account and make an online payment for the charge in full. This method ensures that my credit card statement shows a balance of $0.00 by the time it’s sent to me. The OCM is a bit more time-consuming but it ensures that I don’t forget to pay my bill due to other stuff going on in my life. I have the satisfaction of knowing that all of my charges are paid off before the statement is issued – there are no debts hanging over my head.

 

Very recently, I learned about a third method – the Disposable Income Method. It involves pre-determining how much money from your paycheque to allocate to your credit card each time you are paid. You then tell your credit card company to set your credit card limit at this amount. You also tell them to freeze your credit limit, which means that they cannot raise your limit unless you ask them to. Then you use your card in the normal course and you pay off your credit card in full from each paycheque.  For example, if you know that you can pay $1000 to your credit card account from your paycheque, then you arrange for the limit on your card to be $1000. When you get paid, you pay $1000 to your credit card. You credit card bill gets paid in full and you never carry a balance, which means that you’re not paying interest to your credit card company.

 

This third method has many benefits.

 

One – You never spend more than you can pay off in one paycheque. I will venture to say that most people with five-figure credit limits are not in a position to pay off their five-figure balances in full each month. This is why they carry a credit card balance and why they pay interest on their credit card balances.

 

Two – You will build your credit history quickly. There will be a solid record of you borrowing money on your credit card and paying it back promptly.

 

Three – You can still collect point or airmiles or free food, or whatever benefit it is that you card offers. You can still spend money however you want to, just like you did before. However, you’ve taken the very adult step of ensuring that you’ve prevented yourself from spending more money than your budget can handle.

 

Four – If your credit card is used fraudulently, then the damage that is inflicted is limited to a relatively small amount of money, i.e. the pre-determined amount that you can pay from your paycheque. The criminals cannot go hog wild with your card.

 

And if you’re already in debt, the answer is to stop using your cards. With rates pushing 30%, there’s no way that you can get yourself out of debt while still accruing interest charges on your credit cards. And if you’re paying 30%, then you might as well light your money on fire for all the good that it’s doing you. Paying interest is giving money away to the bank. That money should be in your pocket, not theirs!

 

You’ll need to go on a cash diet, while making payments to your credit card. Pick an amount – higher is better – and pay that amount to your credit card every single month until your card is paid off. Do not make any charges on your card! This means, you stop all auto-pays on your credit card. Why? Auto-pays are new charges, against which interest will be charged until you’ve paid off your debt. You will pay for your life with cash until you get out of debt. And if you have more than one credit card, you will continue this process until all of them have balances of zero. Check out the Snowball Method for detailed instructions on how to get out of credit card debt.

 

Once you’re out of debt, you won’t be paying interest to the bank anymore. You can use your credit cards again, but only if you are committed to one of the three payment methods.

 

All three of these methods work to keep you from paying interest on your credit cards. Pick one of the three methods outline above – all equally effective – to ensure that you don’t pay any interest to the banks. You can even combine them if you’d like. By following any or all of these three methods, you’ll pay for what you’ve purchase and not a penny more!

 

Pay cash for your cars

Buying a new vehicle is not a decision to be undertaken lightly since the financial ramifications can put a serious crimp in your cash flow for a very long time if you’re not careful.

Check out this article on how Canadians are taking out lengthy car loans to minimize the monthly payment. Think about it for a minute. Canadians want expensive vehicles and they’re willing to finance them, but the required minimum monthly payment over a 5-year period is simply too much for their budgets to bear so they agree to repay the loan over 7, 8 or even 9 years! These kind of lengthy repayment periods are lunacy! Like eating too much of your favourite dessert, long-term loans promise delight in the short-term and guarantee regret over the long-term.

Vehicles are expensive! A brand-new pickup truck in my corner of world can run $70,000 or more. Brand new SUVs start around $25,000. Luxury sedans start at the $39,000 mark. Even on the second hand market, a nice vehicle with fewer than 100,000kms will run you atleast $10,000. I’ve seen financing offers last as long as 96 months for new vehicles – 96 months is 8 years! It should never take anyone 8 years to pay off a car loan. Depending on the driver, a vehicle may need to be replaced at the end of the 8 years and the whole cycle of paying a car loan has to start again. Or, even worse, a vehicle may have to be replaced before the loan period expires and the old loan value has to be rolled into the loan on the next vehicle.

I’m here to tell you that there is a way to live without car payments, to go years without ever having a car payment while driving cars that you can afford. This fool-proof alternative path to vehicle ownership completely eliminates the need for financing. It’s called paying cash for your vehicle by saving the money before you buy. It’s not a particularly popular method, and the car dealerships will never advocate for this method. You can rest assured that the Ad Man and his trusty sidekick, the Creditor would have fits if great swaths of the population decided to follow this method for purchasing motorized transportation. Yet, I guarantee that this method will work for you every single time. If you save up to pay cash, you will benefit twice by acquiring a vehicle without acquiring any payments!

Nearly twenty years ago, a woman from a book club to which I belonged gave me advice about how to buy a car. It was exceptionally good advice, which is why I still remember it. She said that her grandfather had taught her how to pay cash for all of her vehicles. I was most intrigued!

Essentially, the advice was to save the equivalent of a car payment in a separate account until the next desired vehicle could be purchased with cash. At the time, Book Club Lady was setting aside $350 each month in a bank account dedicated to buying her next car and she planned to do so for five years until she had enough to buy her next vehicle in cash. Bingo-bango! At $350 per month, she’d have $21,000 in place to buy her next vehicle in 5 years. And after she purchased her vehicle, she would continue to set aside the amount of money (or more if she wanted) in the bank so that she would be in a position to pay cash for the next vehicle. Technically, one could argue that she was still making a vehicle payment but so what? The fact was that Book Club Lady was making a payment to herself and she wasn’t paying any interest on a car debt.

How many of us prefer to finance a car and pay interest to a creditor? Don’t be shy! Raise your hand. Yes, you’re in good company. Car companies make oodles of money through their financing divisions. Why? Somehow, we as a populace have decided that cars are to be replaced and upgraded regardless of whether they are still roadworthy. Replacing one financed vehicle with another one is far more important to us, collectively, than preserving our money for a period of time and buying something outright with cold, hard cash.

I speak from experience. I’ve twice bought brand-new vehicles. The first one was held for 7 years, and I took the full five years to pay it off at a rate of $325 per month. The second one still sits in my garage, 10 years old this year. I was smarter the second time around as it only took me 6 months to pay off the loan. Despite the wise advice of the Book Club Lady’s grandfather, I financed both of my cars and didn’t give a single thought to setting aside my former car payment so that I could buy the next car in cash.

Let’s face it – vehicles cost money to buy. We can either pay a lender to finance the vehicle, or we can put ourselves in the shoes of the lender and simply pay the same amount to ourselves. Either way, we’re still getting a vehicle out of the deal.

My 10-year old SUV is not going to run forever, so I’ve finally started a dedicated vehicle-replacement fund. Every two weeks, $250 from my paycheque is set aside for the purpose of buying my next vehicle. I’ve committed to driving my SUV until the wheels fall off, so hopefully they stay firmly in place for atleast the next 5 years. If my SUV fails me before my chosen time, the money in my vehicle replacement fund will serve as a good down payment on the next vehicle or it might be enough to buy me something that I don’t completely and absolutely love but can live with until I have enough cash to get what I really want.

“So how do you get the first vehicle without financing it?”

Good question. The first option is to figure out how to live without a car – ride a bike, take public transit, walk, Uber. Some of these options might work some of the time, but they’re not all free. I harbor no illusions that everyone can live without a car. If you’re a person who needs a vehicle to live the life you want, then you might be stuck with financing the first car. But that doesn’t mean that you finance the best car available! It means that you finance the cheapest car you can find that meets your basic needs. You keep that car payment as low as possible so that you can shovel money into the vehicle replacement fund.

Let’s say you finance a $5,000 over 3 years at 2.99%. Your car payment budget is $350 per month but your required car payment over three years is only $85. You’re not thrilled with the vehicle but it safely takes you from A to B, which is really all a vehicle is supposed to do for you. While you’re paying $85 on your car loan every month, the other $265 (= $350 – $85) is going into your vehicle replacement fund.

At the end of three years, you have $9,540 (= $265 x 12months x 3 years) in the bank to go towards a new car. You can either buy a new vehicle for $9,540 or you can keep driving the first $5,000 car while socking away the full $350 into your car replacement fund. Since the car loan ended after three years, that $85 dollar payment can now be paid to yourself instead of to the lender. If you save $350 per month for two more years, you’ll have $8,400 which can be added to the $9,540 already in place, giving you a total of $17,940 in the bank to buy your next vehicle in cash.

Alternatively, you decide to pay off the 3-year car loan as quickly as possible. At $350 per month, your $5,000 car loan is gone in 14 months. At that point, you continue to pay that $350 to yourself while you get accustomed to a life without debt. At the five year mark, which would be 46 months later, you’d have $16,100 (= $350 x 46 months) in the bank waiting to go towards your next vehicle.

To my way of thinking, you should keep driving the $5000 vehicle until the wheels fall off! In the meantime, you continue to squirrel that $350 away every single month until you need to buy another vehicle. However, some of you will want to get rid of the $5000 car as soon as you can. Who am I to stop you? You’re an adult so buy whatever you want. Just make sure that you pay cash!

Cutting the Cord

In 2015, I decided to eliminate my subscription to cable TV.

Was it easy to do cut the cord? NO! It honestly took me close to a year to call my cable provider to cancel my subscription. It took me another 6 weeks to return my cable box and the various cords that connected my TV to the world of limitless channels, endless commercials, and the repeated experience of there being nothing on TV that I wanted to watch.

That first Sunday without The Walking Dead was torture. I was very consumed by thoughts of Rick and Darryl and Maggie and Glen and Michonne and Carl, and the many other hangers-on who hadn’t yet been killed by the zombies. Fear not, Dear Reader! The human mind is such that nearly any change can be accommodated once it has been in place long enough. By my third cordless weekend, I was asking myself why I’d ever cared so much about fictional characters who were being chased by zombies. Amazingly enough, my life was still completely satisfying without knowing all the details of the challenges, tribulations and triumphs of the merry band of imaginary folks who devoted their time and energy to avoiding the jaws of the ravenous undead.

So why did I get rid of cable?

Believe it or not, my reason for doing so wasn’t driven by my budget. I have the money to pay for cable television but I chose to cut the cord anyway.

My choice to eliminate cable was driven by my spending priorities, one of which is to not spend money on things that don’t make me happy. Many TV shows are simply garbage – I no longer wanted to pay for garbage. In the same way that I wouldn’t spend money at the grocery store on rotting meat, I didn’t want to direct my hard-earned money to the purchase of subpar television shows.

Despite the increase in diversity on TV (yay!), the vast majority of the plot lines continue to be unrealistic (boo!).  I cannot relate to them. The storylines are not reflective of my life or my priorities, so I was no longer invested in the characters or their particular challenges and conflicts. I found myself watching TV to solely kill time – I definitely wasn’t being entertained! I’m not likely to be engaged in a foot pursuit of bad guys down busy streets, nor will I be trying to uncover various conspiracies week after week. Everyone in my world is human so plot lines with extra-terrestrials or mythical creatures aren’t always relatable to me, although they can admittedly prove to be entertaining every so often. As for sitcoms and rom-coms, they generally wear thin after sooner or later since there are only so many ways for the they-used-to-hate-each-other-now-join-in-the-celebration-of-their-wedding-story to be told.

For example, I love Grey’s Anatomy! As with everyone on television, except the news, the people populating the screen are exceptionally attractive. The good doctors at Grey Sloan Memorial Hospital are forever finding empty closets or lounges at the hospital where they can have sex with each other. And when the hospital is full, they’re inclined to have sex in their cars in the parking lot. More often than not, I wondered how the hospital wasn’t sued for sexual harassment every week. In my world, my employer has very strict rules against sex in the work place!

The questions that I had about the characters were never asked or answered. Specifically, I could never stop wondering about the money aspect of Grey’s Anatomy. Exactly how much did the doctors earn as they progressed through their residencies? How did the hospital make money as a private business? Most importantly, how did their emergency room patients pay for their treatments? No one ever asked them about insurance or sought any kind of payment, yet they received topnotch care from everyone at the hospital for weeks or months on end depending on the storyline. Did they all have supremely good health insurance? On top of the compellingly-written storylines and their associated emotional traumas, were any of the patients or their families thinking about the money?

One of the more beautiful aspects of TWD is that money was no longer a concern so I easily believed that those folks had no financial worries. One season, they even found a newly-built subdivision that had been completed just before the zombie apocalypse so everyone was able to move into a brand-new beautiful home without the hassles of saving for a down payment, arranging for financing, and paying to hook-up their utilities. Even for a show about zombies, this was a bit un-realistic.

Have no fear – I still watch TV. I simply do so on Netflix and CraveTV.

Truth be told, I can consume most of the same programming for a much cheaper price through Netflix and CraveTV. (And if I ever learn how to stream over the Internet, I’ll be able to watch even more shows!) It’s simply smarter to pay the lower amount for the same thing. I looked at cable television the same way that I looked at toilet paper prices. If one grocery store has the same brand on sale for a lower price, why would I go to a different grocery store to pay more? My favourite shows on Netflix are the same whether I’m paying several hundred dollars a month to a cable provider or whether I pay $11 per month to Netflix. Why pay more for the same product?

The exact same shows on Netflix are devoid of advertising. Hooray! I’m now able to watch an episode of my favourite show from beginning to end without the interruption of loud commercials at critical points. Of course, there’s nothing to be done about the embedded advertising within the TV program itself. As a result of consuming fewer commercials, I find that I’m also a lot less inclined to go shopping or to believe that my life is sorely lacking because I don’t purchase a particular shampoo. For me, consuming less advertising translates directly into consuming less stuff. How awesome is that?

And while my decision to cut the cord wasn’t motivated by money, I cannot ignore the fact that saving over $100 per month has been very good for my other financial priorities. Since cutting cable, I’ve saved atleast $3400. It might even be more since I’m sure that my former cable provider has implemented a couple of price increases since 2015 when we parted ways.

And what did I do with that extra $100 per month? Like I said, fewer commercials has translated into less shopping. My former cable TV payment was re-allocated within my budget. I used some of it to pay for my Netflix subscription and I used the rest of it to increase the amount of money that I contribute to my retirement and investment funds.

How about you? What would you do with the money that you’d have if you were willing to cut the cord?

The Fund & the Index

The first time I learned about a F*ck You Fund was when I read an online article from Paulette Perhach. I was blown away by the idea and immediately went to my own numbers to see if I had inadvertently created such a fund of my very own. Short answer – yes, I have!

 

Props must also be given to one of the grand-daddies of the financial independence moment, J. L. Collins, who gifted the world with this wonderful article about F*ck You money and why everyone should have some. Mr. Collins also shared this delightful and instructive video on the importance of being in the position to say “F*ck you!”. This video is not safe for work, nor is it particularly suitable for children. However, it is very suitable for anyone who is looking to ensure that they have options for walking away if the need should arise.

 

A few months ago, the wise couple known online as FireCracker and Wanderer at www.millenial-revolution.com posted an article about how money in the bank limits your employer’s ability to f*ck you over. I’ll call it the Index. In short, there is a strong suspicion among those of us who have worked for a long time that employers are more inclined to exploit employees who don’t have the option of walking away. The exploitation might be job-related, as per the charmer interviewed by Wanderer in his article, or the exploitation might be of the illegal variety, such as the various forms of harassment that are no doubt experienced by countless employees who cannot simply walk away from their paycheques.

 

Both of these ideas were incredibly powerful to me! I’ve been pursuing financial independence for a very long time because I want to know that I don’t need my job to survive. I want to know that I can take care of myself without having to put up with intolerable situations at work. Thankfully, I work in a bright office with smart & friendly people and I get to solve challenging problems for a great salary so I haven’t felt the need to storm out of the building while giving everyone the double-birds…yet.

 

No one knows what tomorrow will bring, right?

 

Having a decent-sized F*ck You Fund provides me with a sense of peace about my decision to go to work every day. I don’t have to go. I can quit and bum around for a little while before finding another position. If the circumstances warranted it, I could take a dream job for a drastic cut in pay and still reach my retirement goals thanks to having met my Coast FI number. Building this particular pot of gold one dollar at a time alleviates the frustration that I sometimes feel at work because I know that I don’t have to stay – I don’t feel trapped because I know that I have options! Even if I never have to storm out of my office, it’s very comforting to know that I would be okay if I did.

 

I would suggest that you create a F*ck You Fund for yourself, if you haven’t already. Unlike an emergency fund, the fund gives you options beyond mere survival if you find the need to part ways with your current employer. It puts a little bit of power back into your hands so you can say “No” to your employer when it’s reasonable to do so without having to worry about how to put food on the table and a roof over your head. This is where the Index comes in. You’ll gain the confidence of knowing that you won’t have to eat whatever crap is dished out your way because you will have a feasible option for taking care of yourself until you find your next job. Near as I can tell, the size of your fund has an inverse relationship to the amount of grief and misery that you’re willing to put up with at work. The more F*ck You money that you have, the less poop you have to eat.

 

Please do not mistake an F*ck You Fund for being financially independent. Being FI might mean never having to work but a F*ck You Fund definitely means never having to work for a jackass. The distinction is subtle, but ever so important.