Tag: Debt

Beware the HELOC!!!

HELOC is an acronym that stands for home equity line of credit. It is a way for homeowners to access the equity in their homes without actually selling the home. Banks love these kinds of loans because they are secured by the property. For this reason, HELOCs are risky – they put your shelter at risk. This is hardly ever a wise move from the personal finance perspective!

In short, if a homeowner doesn’t repay the HELOC, the bank has the right to foreclose on the home in order to recoup its money.

Another way to think of a HELOC is to view it as a line of credit that is tied to your house. An unsecured line of credit carries a higher borrowing rate, since the bank doesn’t have any recourse if you don’t make your LOC payments as required. Banks presume that most people do not want to lose their house and that they’ll do whatever they have to in order to avoid that unfortunate outcome. As a result, the risk of delinquency is also presumed to be lower than lending borrowers money through an unsecured line of credit. Since the HELOC has a lower risk, the bank charges a lower rate of interest.

Those who’ve been reading my blog for a while now already know that I hate debt. Payments to creditors prevent most people from investing for their futures. Debt forces people to put today’s income towards paying for past purchases.

I especially despise the HELOC. Like all loan products, banks benefit from them more than the consumer. If you have a HELOC, you have to make payments on the loan each month. And if you miss enough payments, then you’re considered delinquent on your debt and the bank can take your house away from you. This is why I personally believe that HELOCs are risky.

Remember! A HELOC is a charge registered against your mortgage. When you take out a HELOC, you’re putting your home up as collateral.

If you really must take out a line of credit, then I would urge you to get an unsecured line of credit. This kind of LOC is not tied to your house. If you fail to pay it, you certainly damage your credit rating… but no one is going to take away your home. It might take 7 years to repair your credit, but so what? It’s better that you repair it from the comfort of your own abode, than suffer the double-whammy of repairing your credit and also losing your home through foreclosure.

Another reason I very much dislike the HELOC is that it is a loan that can be called at any time. A HELOC is a demand loan. That means your bank can demand that you repay it whenever they want.

Let’s say you take out $45,000 of debt via a HELOC against your $375,000 house to do… whatever. (Equity withdrawn via a HELOC can be spent however the homeowner sees fit.) You agree to repay the HELCO at a rate of $750 per month. You’re making your payment as agreed, and getting on with the business of living your life. For reasons they need not declare, your bank gets twitchy and demands that you pay off your outstanding HELOC balance. And if you don’t, they’ll proceed with foreclosure proceedings to get their money bank. You’re suddenly in the position of losing your $375,000 house over a $45,000 debt…Not good!

How are you going to repay the debt? If you’d had the money in the first place, you wouldn’t have borrowed from the bank, right?

I’d suggest that you think long and hard before you take out a HELOC against your home. Make sure you understand what you’re risking before you sign on the dotted line. And if you already have a HELOC, then I suggest that you pay it off as soon as you can.

Life is stressful enough. The risk of your home possibly being the subject of a foreclosure is one added stress that you should work very hard to avoid.

Debt is not Wine!

Time is good for wine, but it’s very bad for debt.

Blue Lobster

Though it should be obvious to everyone, I’m going to say it again. Debt is not wine.

Hear me now! Time makes debt get worse. This is not a secret. Nor should it come as a surprise. The longer you keep it, the worse it gets. And there is no limit to how big a debt can get.

You know how they say that fine wine gets better with time? Debt is the complete opposite. Debt get WORSE over time. Due to the impact of compounding interest, all of your debts will get bigger the longer you keep them around.

Gangrene gets worse with time too, but only so much. Eventually, flesh that is infected with gangrene is removed. Gangrene has an end life. Debt is worse than gangrene because it can go on indefinitely. For those in the cheap seats who insist on pedantic accuracy, it is true that both gangrene and debt end when the host/debtor dies. However, I’d like to see you get rid of debt (and gangrene) before you shuffle off this mortal coil.

Debt gets worse over time.

Time is the ally of the creditor and the enemy of the debtor. When you borrow money, you’re a debtor and you’re obligated to repay both the amount your borrow and the interest on that debt. Think of the interest rate as the price you pay to borrow money. You might need $1,000 to fix your vehicle. If you borrow money, the creditor is going to charge you interest. For simplicity’s sake, let’s assume you borrow $1,000 for 1 year at a rate of 5% per year. At the end of the year, you have to repay $1,050 to your creditor.

And if you can’t repay your creditor, the interest rate of 5% continues to compound that debt. At the end of the second year, you’ll owe your creditor $1,102.50 (=$1,050 x 5%). At the end of the third year, you’ll owe your creditor $1,157.63 (=$1,102.50 x 5%). And the amount of money owed just keeps going up until the debt is paid.

Take a look at your credit card statement. How much interest is being charged on your credit card balance when you don’t pay the full balance every month?

So there’s two factors impacting the growth of your debt: time and interest rate. You know how when you invest your month, you want a really high rate of return so that your investments grow really big, really fast? Your creditor feels the same way about the debt you owe them. I can assure you that your creditor does a happy dance when you take out an 8% car loan, or a 19.99% credit card loan. The higher the interest rate you pay, the better rate of return your creditor is getting.

Do yourself a favor. Take a pen and a piece of paper and physically write out how much interest is charged annually on your current credit card balance if you let your monthly balance roll over each month. Now add on another year’s worth of interest. For good measure, keep doing this calculation for 10-15 years. The resultant number should make you slight nauseous.

Take a look at this list of facts about credit cards in Canada. Two years ago, the average credit card debt was $4,240. And since this is an average, there are some people with much higher balances! Plug the average number into the compounding calculator of your choice and watch the numbers jump, year over year… I feel sorry for the person who doesn’t have the high income to wipe out this kind of debt in a month or two. High interest debt can balloon very, very quickly.

Wine ages well. Debt…not so much.

Again, debt is not wine. Here’s another simple way to tell the difference between the two. Seeing the end of one makes you sad, but ridding yourself of the other will bring you financial contentment.

When my wine is all gone empty, I’m sad – even if it wasn’t a great bottle of wine. Yet when my debts are all paid off, I do a little happy dance and smile brightly for the rest of the day.

Do what you need to do to get rid of debt. Maybe you give up cable and other streaming services for 12 months? Trust me when I tell you that they will always re-start your subscription. Cook at home a little more often than you normally do. You can continue to get take-out or delivery, but just get them one or two days less each week.

The time will pass anyway. Pay off your debts and start investing your money so that you can pursue your heart’s truest desire. Once your money is going towards your investments instead of towards paying off debts, then time will be working for you instead of against you. And wouldn’t that be a really, really good thing?

Student Loans are an Anchor

When I was younger, I was convinced that student loans are an anchor. I believed that the best course of action was to eliminate them as soon as humanly possible. Full stop – no further discussion needed. Paying off student loans ASAP was a sign of being a mature adult. One did not carry debt if one could pay it off early. Being debt-free was the Holy Grail!

Suffice it to say that my views on student loans have become more nuanced as I’ve aged.

Full disclosure. When I graduated from post-secondary, I had student loans of just under $15K. My salary was paid bi-weekly, so I made extra student loan payments from every paycheque. These were on top of my regular monthly payment. I was fortunate enough to receive bonuses at work, so my first two years’ worth of bonuses went towards my student loans. Within 2 years, those loans were gone!

For the most part, I still believe that student loans are an anchor for many folks. If you’ve got a $200, $400, $700 student loan payment every month, that’s a big chunk of money that isn’t being used to build a better future for yourself. It’s not going towards a down payment. The money isn’t being set aside for your “thirsty underwear” years. (Hat tip to Garth Turner at Greater Fool for that descriptive phrase!) Those funds aren’t seed money being deployed in your own business. Depending on your circumstances, it could take you a very long time to pay off your student loan debts. Time that can never be recovered.

Truth be told, I still encourage people to focus on paying off their student loans. After all, it’s good to have less debt. Do what you can to make extra payments. Set up a per diem and have that money sent to your student loans every week. Do it via automatic transfer. If it’s $1/day, then send make an extra payment of $7/week. If you can afford $5/day, then that’s an extra $35/week. And if you can swing $10/day, then you’re looking at extra payments of $70/week… which is a very sweet $3,650 per year. The higher your per diem, the faster the debt goes away. Make this extra weekly payment on top of your regular minimum monthly payment. If you’re fortunate enough to get a raise or income from a side hustle, then use some of that money to pay off your student loans even faster.

When my student loans were gone, I felt very proud of myself. A debt obligation had been lifted from my shoulders! I was one step closer towards being debt-free. Yay, me!

Nuance…

It’s been over 15 years since I paid off my student loans. And I’ve learned a lot about investing in the stock market. Had I paid the minimum monthly payments on my student loans and invested in equities… <sigh> … Well, I’d be the Retired Blue Lobster by now, and my student loans would also be completely paid off. All else being equal, my loans would have been paid off in 9 years and I would have an even larger investment portfolio. My money would have had an extra two years to grow and all those extra payments would’ve been invested for growth.

Make no mistake! I still believe that student loans are an anchor. Yet, I’ve also come to believe that investing the stock market for the long-term is slightly more important than paying off student loan debt ASAP. This is because the weight of that debt burden, i.e. anchor, is reduced in two ways. Firstly, the debt gets smaller each time you make your minimum monthly payment. Secondly, the debt becomes a smaller portion of your net worth as your investments grow over time. Eventually, the debt will be gone and you’ll have a nice cushion of cash in the form of your investments.

If you go hard on your student loans to the exclusion of investing, you’ll be debt-free sooner but there’s no cash-cushion at the end. If you’re fortunate enough, you’ll be able to immediately re-direct your former student loan payments to investing. It seems trite to say this but I will anyways. Focusing solely on paying down debt robs you of the time that your money could have been working hard for you in your investments.

Investing early is a key to building wealth.

I’m not talking about investing money in a single stock and hoping that you’ve managed to get in on the ground floor of the Next Big Thing. From my perspective, that path is simply gambling. If you want to gamble, save your money and go to Vegas – it’s a lot more fun to gamble in Vegas!

The kind of investing that I’m referring to involves holding a broad-based equity exchange-traded fund (ETF) over a very long period time. Regular, consistent contributions to this kind of product gives investors access to the entire stock market and removes the temptation to jump from one promising stock to another.

An ETF offers you the chance to invest in a lot of companies at once. While they’re hardly exciting, ETFs offer regular people the opportunity to invest in some of the biggest companies in the world. You don’t have to be a genius, nor do you have to be lucky. The Next Big Thing will eventually become part of the ETF’s holdings, so you’ll still wind up own a sliver of it. And you’ll have avoided the risk of investing all of your money in one single company.

You should definitely read The Simple Path to Wealth by J.L. Collins. He does an excellent job of explaining why and how this works. Rest assured that I am not being paid for mentioning this book.

Real estate is another way to make long-term investments for the future. To be explicitly clear, this is not my preferred method. I am not an expert in real estate investing. If this interests you, then check out Bigger Pockets. I follow this account on social media and I’ve learned a lot. Again, I’m not being paid for mentioning them.

Some people can’t do both.

Fair enough.

I appreciate that not everyone has this option of to investing while paying down debt. Maybe you don’t have the money to do both. Reality being what it is, money only stretches so far. Or maybe the thought of debt causes you psychological distress. If that’s the case, then pay off your student loans as fast as you can. They are an anchor on your wallet. They prevent you from investing in your future because they force you to pay for your past.

You’ll make the best choices that you can with the information and money that you have available.

However, there are those in my audience who have enough to pay off the minimum student loan bill while also investing. If you’re fortunate enough to be in these circumstances, then I strongly urge you to do both. It may take you years to pay off your student loans. That is time that you can never get back. It makes the most sense to be investing in the stock market or in real estate while also paying down your debts. Your investments should be growing while your debts are decreasing.

Student loans are an anchor. There’s no doubt about it. However, how your handle those student loans will drastically impact your wealth-building goals. I don’t have all the answers because everyone’s situation is different. I just want you to think long and hard about what will work best for you.

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Weekly Tip: If you must finance a car, follow the 20-4-10 rule. Always put down 20% of the car’s purchase price. Make sure the loan is for a maximum of 4 years. Do not let the car loan be more than 10% of your annual salary. When your loan is paid off, keep making the payment to your Next Vehicle Fund so that you can pay cash the next time around.

Silver Linings

The silver linings are there if you look for them, even in a pandemic. We all know that COVID-19 has changed things in a fundamental way at a societal level. However, as with most things in life, its impact on individual lives is different depending on one’s access to money and resources.

Over the past few months, I’ve been reading articles about how some people are seeing an improvement in their finances in the midst of COVID19. Working from home means that people are saving money on professional wardrobes, commuting costs, grooming products, cosmetics. Some people are even moving from their expensive locales to cheaper areas since they no longer need to be physically close their offices. In other words, people haven’t had to spend their money in certain categories because COVID19 allows them to work in their pyjamas in the comfort of their own homes.

There is no arguing with the fact that the pandemic has severely impacted life as we knew it a mere 7 months ago. Yet, there are some pretty serious financial benefits for some people. The people I’m referring to still have steady and substantial paycheques, yet they can work from home. For this fortunate group, their income is the same yet their outgo has dropped.

If you’re one of the fortunate ones who still has a reliable income, assess your own situation. Determine if you’re saving money by working from home. If so, calculate whether those savings are getting you closer to your financial goals.

There’s some chatter in the system about a vaccine for COVID19. No one knows when it will be found, nor how quickly it will take for all of us to get it. All we know for sure is that the pandemic won’t last forever.

We can also very be certain of the following. Regardless of whether we move back into our old offices, spending will go up. Think of the concerts, retreats, tournaments, and conferences that have all been put on hold due to the pandemic. Those will return with a vengeance. People who’ve chosen not to risk traveling will be on the way to the airports within days of getting vaccinated. After all, time is precious and the world is a big place. Those struck by wanderlust will be making up for lost time.

What I’m saying is this. Take this opportunity to save. Nothing obligates you to spend the money you’re saving by working from home. I’m not even suggesting that you hoard every penny. I’m urging you to take note of the financial silver linings that available to you during this pandemic.

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Weekly Tip: Listen to podcasts about money. You’ll learn a little something about a great many things. Try out a few different ones. Take what you like. Leave what doesn’t work for you. Be open-minded, but don’t let your brains fall out. As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others.

Old-Fashioned Advice

It struck me recently that one of the reasons I’ve achieved some of my personal finance goals is that I’ve followed old-fashioned advice. These are the top three nuggets that come to mined.

  • Stay Out of Debt.

This particular pearl has served me well. I’ve had credit cards in my wallet for more than 25 years. I’ve paid interest once, and that was because I’d miscalculated when I made my payment. I don’t carry a balance on my credit cards.

The credit card companies would call me a deadbeat. I wear their moniker with pride.

One of the keys to becoming a deadbeat is to have an emergency fund and other accounts to fund short-term inconvenience. If you have a vehicle, then you know that you’re only one weird sound away from a mechanic’s bill. When my vehicle needed $600 of work, I had the money set aside in an account set up to field these kinds of expenses. Mary Hunt calls this a Freedom Account, and she describes it in her book Debt-Proof Living.

If my house burned down, or I lost my job for an extended period of time, then I’d go to my emergency fund in order to pay cash for my living expenses. I have insurance on my house but why should I pay the credit card companies interest while I’m waiting for my insurance money? And if I’m out of a job, that’s hardly the time to be incurring debt in the form of 19.9% interest payments to the banks. I have money set aside so that I don’t have to turn to credit cards during the bad times. You should too.

It takes as long as it takes to create a nice, fat cash cushion of emergency money. Start today.

  • Pay Cash.

The following method has worked for me. I suspect that it will work for you.

First, I identify what I want. Second, I look at my bank account to see if I have the money.

The third step goes one of two ways. If the money is already in my bank account, then I buy what I want. If the money is not in my bank account, then I don’t make the purchase.

Fourth, I get what I want… when I have the cash in hand to pay for it. The fancy term for this is delayed gratification. Call it what you want. The bottom line is that paying cash throughout my life has benefitted me far more than any inconvenience caused by waiting.

  • Pay Off Your Mortgage

I was lucky enough to get into the housing market with a modest, mid-sized mortgage under $70,000. When I moved from my first home into my next one, I bought a property that suited my life circumstances. I did not accept the bank’s gracious offer to lend me several times my annual income. My refusal of that gracious offer has meant that I live in an older home that’s roomy enough for a Single One. It also meant that I could pay off my mortgage in my mid-30’s. I’m happy to report that those former mortgage payment are now the foundation of my automatic investment plan.

I know that there is a lot of debate among very smart people about whether to invest or to pay off your mortgage. Today, we live in a world without pensions and $300,000+ mortgages. Essentially, these two facts combine to create circumstances where people can spend their entire working lives paying off a mortgage. They may not have any “extra” funds to put towards retirement. Every dollar is allocated to paying for the mortgage and for the costs of living. Most people enjoy the little luxuries – you know, food & transportation. Crazily enough, they’ll even prioritize those luxuries over saving for a retirement that’s decades away. Even I go back and forth on whether I should have taken 25 years to pay off my mortgage so I could have invested in the stock market for a longer period of time.

Since paying off my home 10+ years ago, I’ve never worried about having shelter. Rental increases haven’t impacted me, because I own my home free and clear. Mortgage rates no longer make me apprehensive, because I don’t have to worry that my budget will be impacted if those rates shoot up. (Of course, that’s a hollow argument in the mortgage market of 2020 – when 5-year rates can be had for less than 2.5%.) I no longer have to hope that absolutely nothing goes terribly awry with my paycheque for over two decades so that I can service a gigantic debt. This last benefit just might be my very favourite – sleep is easier without money worries.

I still think paying off your mortgage is a great course of action. At the same time, I’m realistic enough to recognize that it’s not always the best option.

Everyone’s situation is different so use these nuggets as you wish. Stay safe – wash your hands – be well.

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Weekly Tip: Ladies, you’re statistically more likely to outlive men so you should invest a greater percentage of your portfolio in equities to generate higher returns over your longer lifespan. Withdraw your age from 120 and allocate the number as the percentage of your investments to the equity portion. As you become a more sophisticated investor, you can change this percentage if you want.

Beware the Minimum Payment!

Right from the get-go, I’m going to ask those of you who already know this to forgive me for stating the obvious. Minimum payments benefit the lender way, way, way more than they benefit the borrower.

Beware the minimum payment!

When you borrow money from the lender, you’re taking out a loan. And when you do so, you’re agreeing to pay interest on the money borrowed. The loan is governed by a contract, so the very best time to amend the terms of the contract – and thereby the terms of the loan – is before you sign the contract!!! In other words, don’t take a loan if you don’t believe that the terms of the loan will be beneficial to you.

The repayment terms of the loan are set out in the contract. If you don’t like them, or the lender won’t change them, then don’t take the loan. This is the most effective way for you to avoid having repayment terms in your life that may cause you financial grief in the future.

And for those wondering how to buy what you want without a loan, the answer is that you will require a combination of cash and patience. Save up your money then make the purchase. You’ll get what you want. You won’t pay any interest. It’s the ideal situation so strive to make it your reality.

However, there are times when you simply need to borrow money to get what it is that you want. If this is the situation in which you find yourself, then I want you to be very aware of the trap of minimum payments.

Making minimum payments benefits the lender because they can charge you interest on the outstanding loan balance for the longest period of time. If you take out a 5-year car payment, then the loan is structured so that the lender earns as much interest as possible off the loan. In other words, you as the borrower will pay back the maximum amount of interest.

The legal way to minimize the amount of interest you re-pay on the loan is to make extra payments. Get a second job – sell some stuff online – cut some subscriptions from your life. However you choose to find extra money is up to you. The bottom line is that you take that extra money and apply it to your outstanding loan. Go back to the car loan for a hot minute. If you can make extra payments on the loan and pay it off in 2 years instead of 5, then you will keep three years of interest payments in your pocket rather than sling that money into your lender’s pocket.

As of the date of publishing this blog post, the banks in Canada are allowing mortgage holders to apply for a six-month deferral of their mortgage payments. If approved, people who have mortgages won’t have to make mortgage payments for six months. It’s called a mortgage deferral.

This deferral means that the people who took out a mortgage will have to repay the money, eventually. (I’m not an expert on how the program works. If you need the details, please contact your bank.)

Make no mistake. The banks want their money back. The banks lent the money to borrowers at an agreed-upon rate of interest for an agreed-upon period of time. That the banks are allowing borrowers to defer repayments on their mortgages is quite unprecedented in my experience. What I wonder is whether the borrowers understand that a deferral of their mortgage payment is not the same as a waiver. The deferred payments are still outstanding. And borrowers will continue to owe interest on those payments until the money is repaid to the lender.

Again, the banks want their money back. So if a borrower receives a deferral from their bank, the borrower still has to repay that money. And guess what? Interest will continue to accrue on that deferred payment.

What? Are you surprised? Did you think that the banks would stop the interest clock from running? If so, gently hit yourself on the head with a hammer. Of course, the banks are going to continue to charge interest on their loans.

This is not a debate about the morality of the banks during the COVID19 pandemic. What I want to impart in this post is that the second best option is to get out of debt as fast as possible. Minimum payments are not your friends. In the case of a mortgage, the numbers are a lot bigger so a deferral is going to mean a much higher amount of interest will be charged during the deferral period.

If you’re considering applying for a mortgage deferral, keep the following in mind. A deferral means that the money is not being paid back as agreed upon in the loan. It does not mean that the money remains outstanding without interest being charged by the lender.

Allow me to state this concept another way. The interest only stops accruing when the loan is repaid. Paying later means paying more interest. The only way to avoid the interest charge is to repay the loan.

Beware the minimum payment! It never benefits the borrower.

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Weekly Tip: Once you’ve finished making debt payments to a lender, continue making those same payments to yourself. Re-direct your former debt payments to a high interest savings account. You were living without the money when you had a debt, so continue to live without that money when the debt is gone.

Shopping Season

The shopping season is upon us once again! It used to be called the Christmas season or the holiday season but the notion of Christmas or holidays is no longer emphasized.

When I look around, all I see is the emphasis on shopping. Apparently, the proper and just way to show your love to family and friends is to empty your wallet. Every retailer under the sun is exhorting you to spend-spend-spend! If you’ve got a nickel, they’ll happily take it.

Need a gift for your bus-buddy’s grandmother’s snow-shoveller? Then head over to Staples and find just the right thing!

How about a little something for the hostess’ dog-groomer’s roommate’s twin sister? Surely you’ll find what you need at Tim Horton’s.

And let’s not forget to buy a gift for your neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law, okay? Surely, the perfect gift is just waiting to be found on Amazon.

I jest…but not by much.

Gift-giving expectations have exploded.

When I was a child, it was way back in the dark ages. People read by candlelight. A full-sized chocolate bar cost $0.05. It was a 10-mile walk to school, both ways uphill. Back then, a seasonal greeting was sufficient and no one expected anything else.

Today, the retailers have brain-washed us into believing that we should spend whatever it takes to buy something for everyone that we know. It’s insidious! What if my neighbour’s chiropractor’s assistant’s step-sister’s tennis instructor’s mechanic’s first mother-in-law doesn’t like the tin of saltwater taffy that I gave her? I spent $42 on shipping – she damn well better like it!

When we buy into the notion that everyone needs atleast one gift from everyone else, then we tacitly accept that money has to be spent or else someone won’t be happy.

Time – the Ultimate Gift

You know what has worked to create better relationships and strong connections? Spending time with people. Playing cards & board games, completing a puzzle together, or hosting a potluck allows for people to share their lives, talk about their dreams, laugh together, and make some good memories. Time is priceless because it is finite. You only get so much of it and it’s best not to waste it.

When you choose to spend time with someone, you’re giving them something precious. You can’t buy time, but you can use it to create spheres of intimacy where you, your friends and your family can just be. In today’s world, where the constant demand is to do more, be more, spend more, achieve more, one of the best gifts of all is creating a space where it’s okay to just chill, to simply relax, to be together with those whom you cherish.

I’m not trying to pretend that you don’t need some money at this time of the year. If you have to travel or you’re making something that’s not on your regular grocery list, then funds will be needed. If you’re hosting out of town guests, then you’re going to need some extra funds for the additional costs of running a household with a few more bodies. I don’t want to give the impression that this time of year doesn’t deliver some solid punches to your pocketbook.

However, I do want to disabuse you of the notion that buying stuff is the way to find the kind of relationship that you want. No one wants to feel like they’re simply a wallet-on-legs. You want to feel appreciated, not taken for granted. Going into debt to buy gifts for other people is not the way to create the genuine relationship that you most truly desire.

Spend cash! Spend cash! Spend cash!

If I can’t convince you to cut down on the number of presents that you dole out, then perhaps I can persuade you not to go into debt to do so. Keep the credit cards out of your wallet – don’t take them to the mall – most definitely do not use them online! If a website already has a copy of your credit card information saved, then go an delete it immediately. You need to slow down the speed at which you spend your hard-earned money. I call this slowing down process “financial friction”. You will need to create some friction between your viewing of an item and the purchase of that item. Friction will impede your ability to go into debt during the shopping season. This is a very good thing!

Trying to buy someone’s love is a bad idea. Going into debt to buy someone’s love is an even worse idea! If your plan to buy affection doesn’t work, then you’re in debt while also failing to get what you really crave from someone else.

At the root, everyone wants the same thing. People really want to be accepted and loved for who they truly are. They want a genuine connection to others and to know that they are cherished. Your wallet can only buy stuff – it cannot buy the intangible elements of a wonderful relationship.

After all, if your relationship is based on money, then what’s left if the money goes away? How do you know that you’re loved for who you are rather than for what you can buy?

As hard as this may be to believe, I have nothing against gifts! I enjoy giving them and I enjoy receiving them. What I’ve learned over my years is that the amount spent doesn’t correlate to the importance of the relationship in my life. The people in my life love me after shopping season is over, whether I’ve given them a $2 garage-sale mug, a tin of homemade baking, or the latest fancy electronic toy. Tossing aside my financial goals and going into debt to buy gifts for other people hasn’t resulted in stronger relationships.

Look, I’m not telling you to stop buying gifts. I just want you to think about why you’re buying gifts. And I’m going to gently suggest that you spend a little bit less this year in presents. Those who really and truly love you won’t stop loving you if the box under the tree is slightly smaller this year.

Trust me on this one.

Minimize Your Vehicle Debt

It is ridiculously easy to incur as much vehicle debt as much as possible – aka: more than absolutely necessary – when buying a new set of wheels. You simply have to do the following three things:

  • borrow as much as you possibly can,
  • get a really high interest rate; and
  • pay the absolute lowest minimum monthly payment.

Taking all of these steps will ensure that you acquire and maintain the maximum amount of vehicle debt for as long as possible.

… Wait – what?!?!?

On the off-chance that you’d like to keep more of your money for yourself, this article will teach you how to manipulate a few financial levers. By following some or all of these tips, you’ll get a new vehicle. The side benefit is that more of your hard-earned money will stay in your own damn pocket.

Ideally, you’ll pay cash for your next vehicle. The sad truth is that we don’t live in an ideal world. Gentle Readers, I know that most of you will take a loan and spend several years paying off your vehicle debt.

Should you wish to avoid paying the maximum on your debt, then heed the following words. There are several levers at your disposal to keep your vehicle debt as low as possible.

Lever 1 – Buy a less expensive vehicle

First, you don’t need the most expensive vehicle that your budget will allow. It’s perfectly okay to drive something that costs a wee bit less than what the car dealer wants you to finance. Be completely honest about what you need, not what you want. All you really need is a vehicle that will safely get you from A to B.

Your worth as a human being is not determined by the car you drive. Transportation should never have any impact on your self-esteem. People who care about how your car looks aren’t the ones who are paying for it. If they want you in a $95,000 SUV, then let them foot the bill. Your goal should be to drive what’s best for your budget because you know that your value as a human being is not dependent on the kind of vehicle that gets you from one destination to the next.

It never ceases to amaze me how many people never consider the option of spending less money in the first place!

Lever 2 – Get the lowest possible interest rate

I cannot stress this enough. There are 2 portions to each of your loan payments – the interest and the repayment of principle. The interest rate is the price you have to pay to the lender for borrowing their money. If you have a low interest rate, then more of your payment will go to repaying the principle instead of lining the finance company’s pockets. The opposite is true. A high interest rate means that more of your payment goes towards paying interest.

The interest rate applied to your vehicle loan will fluctuate with your credit score. A higher credit score results in a lower interest rate. Conversely, a low credit score results in a higher interest rate.

Lever 3 – Increase your monthly payment

Increase your monthly obligation results in the loan being paid off more quickly.

For example, let’s stay that you can get a 5-year loan for $150 per month. If your budget will allow for a $350 payment, then make the higher payments for a shorter period of time and pay off your debt years earlier. Hear me well as I say the following to you…

Making the minimum payment never benefits the borrower!

Paying the lowest minimum amount always results in the maximum amount of interest being sent to your lender. Paying a higher amount than absolutely necessary is a form of short term pain for long term gain.

Lever 4 – Make a big down payment

Your down payment on your next vehicle should be as large as you comfortably afford. The larger your down payment, the smaller the monthly payments required to completely eliminate the loan.

You’re going to have to pay for the vehicle anyway so minimize the pain by paying for it as fast as you can. Hopefully, you’ll be able to sell your previous car privately and get more money than by selling it to the dealer. There’s always the chance that you’d been saving up for your next car in anticipation of being able to pay cash, but something went awry and you had to buy sooner than you’d anticipated. If that’s the case, then good on you! Use the money from your vehicle savings fund as your down payment.

Lever 5 – Make loan payments to yourself

Once your loan is paid off, continue to save the payments in a separate account. Your current car will not last forever. And no – paying off one loan is not an automatic trigger to buy your next vehicle. Drive your vehicles until the wheels fall off!

Trust me on this – your car purchases will always incur far less hassle, angst and financial worry if you already have money in place when it’s time to buy the next vehicle. By continuing to save your car payments, you’ll give yourself two options: you’ll either have the cash on hand to simply pay for it all at once or you’ll have a sizeable down payment to ensure small monthly car payments.