Friday, September 5th, 2008
How about doing both at the same time
Many financial writers will claim that everyone needs to build and emergency fund of some kind that is kept in a liquid vehicle such as a high interest savings account ( I prefer ING DIRECT ) a money-market fund, or some other readily accessible investment like a cashable certificate of deposit.
While I am a fan of financial leverage and will swear up and down for as long as I live that leverage is the ONLY way to build exponential wealth, I still believe in making extra payments on my mortgage versus having excessive funds in a savings account.
First off, I do have a savings account but it is hardly at the level of 6-12 months of living expenses. In fact, it consists of about 3 months of living expenses and possibly less from time to time. What I do have is a mortgage with an attached revolving interest-only line of credit.
The reason that I make extra payments on my mortgage (after funding all of my tax advantaged investment accounts) is that I reduce the amount of interest that I pay on the principal of the mortgage amount. My mortgage interest rate is currently at 4.25%, while my savings account interest rate is just over 3.0%.
Therefore, because all payments made against my mortgage simply increase the amount available to me through the line of credit, it is financially smarter to pay down the mortgage and borrow the money back for investing (When and if I find an appropriate investment) rather than pay the 4.25% interest on the mortgage and collect 3+% interest on my savings.
P.S - In Canada Interest paid on loans for investment purposes is tax deductible, while mortgage interest on a principal residence is not. Check with your personal tax advisor for an explanation of the advantages.
Psychology of Money
Of course there is the psychological factor of knowing you have cash in the bank in case of an emergency. However, there is also a psychological advantage to reducing your mortgage (or other debt - I only have mortgage debt left).
For most folks it is a good idea to have a “rainy day fund”. However, if you can mange credit wisely it may be in your best interest to set up an appropriate line of credit for emergencies. In addition, you will then also have the ability to pounce on investment opportunities that might come out of the blue.
Remember, strike a balance that is right for you and always due your due diligence!
Posted in Investment News, Investor Education | 1 Comment »
Thursday, August 21st, 2008
There’s really nothing like a poor economy and a tumbling stock market to send people’s financial plans into a tizzy! So, where can we look for guidance and assistance in these troubled financial times?
Some “experts” are now saying that this is the time to buckle down on spending with rising energy and food prices. Wow, I guess that “late breaking news” really caught us off guard - good thing there are financial experts out there to save us from this financial apocalypse.
Let’s see what the experts have to say:
The Canadian Government
Statistics Canada says gas and food prices are eating up a larger portion of our spending money, while CIBC reports household debt in Canada is rising faster than personal disposable income.
You don’t say? I guess nobody saw that one coming!
A “Smart” Canadian - The Usual Suspects
“It takes a rough patch in the economy like this for people to take a look and see where they can save money,” says Pat Foran, author of the Smart Canadian’s Guide to Building Wealth.
I’m pretty sure that this is what everyone should constantly be doing to build wealth. Always look for ways to cut spending and use that extra cash to increase your asset base.
- Foran recommends reviewing everything from your cable and cell phone bills to seeing where you can trim costs, going to the library instead of buying books, and renting movies instead of going to the theatre.
- Bringing your lunch to work a few times a week also saves money, as does cutting back on daily trips to the coffee shop for a java jolt.
- An economic slowdown is also a good excuse to cut expensive bad habits, such as smoking or overdrinking, Foran says.
- On big ticket items, he says consumers should consider used cars instead of new and putting off that vacation to Mexico when a trip closer to home might suffice.
For many families, Foran says budgets don’t work and instead recommends “forced savings,” which means setting aside a certain amount of money from each paycheque for investment.
Could Foran be any more vague? I guess we have to buy the book - good marketing strategy!
Go On A Money Diet
Patricia Lovett-Reid, author and senior vice-president at TD Waterhouse, recommends cutting back spending as if you were cutting back on calories for a diet.
Because we all know how easy it is to stick to a diet!
“There is some mindless spending going on,” she says.
“Look for ways to cut back so you don’t feel like you are on a budget.”
Hmmm…any ideas?
Another tip she has is to avoid shopping in bulk because the mass quantities that are purchased are sometimes not used and are discarded or wasted.
“If you look at what you throw out, you aren’t really further ahead … it might be better to purchase in smaller quantities.”
She also says that being an early adopter of technology is very expensive. I can concur with this as many folks purchase more computer than they need (you don’t need a $3000.00 computer to surf th enet and write e-mails) and don’t even know about half of the features of the new iPhone, for instance.
Review Your Debt
Many experts recommend refinancing your mortgage and consolidating high-interest debt through a line of credit where possible.
This makes sense if you have credit card or other high interest consumer debt.
“If you refinance and get a new mortgage you pay principle and interest on the entire amount from day one … . However, if the purpose of your refinance is to consolidate but not use all of the money at once, then set up a line of credit. You only pay interest on the amount you borrow at the time you use it,” says mortgage expert Peter Kinch.
However, he says be wary of how you used that line of credit.
“We want to make sure people don’t get into the habit of using their house as an ATM machine,” Kinch says.
Very thoughtful for a guy who just “sold” you a line of credit. Too bad this advice comes a little too late for some. For the sake of disclosure, I have a home equity line of credit that I use for investment opportunities.
What I Don’t Get
There are two major things that stick out to me in all of these expert articles and financial media mumbo jumbo.
Nobody suggests paying down debt. Everyone talks about consolidating debt and lowering interest rates, but nobody actually says (or writes) that you should pay that debt down. This is absolute craziness. In an economy like we are facing today, it should make absolute sense that people should be reducing their total debt. I recently outlined how reducing debt provides a guaranteed return on investment that is virtually unmatched.
What about the stock market? When the stock market is high all of the experts are telling us to buy stocks and that stocks are a great investment, but when the stock prices of those “great companies” are 20% lower, all of a sudden investing in the stock market is “risky” and not at all a good idea. This is absolutely counterintuitive to the basic investing tenet of buy low - sell high! In fact, one could argue that investing in the stock market now is less risky because prices are lower.
I am not claiming to be a financial expert, but the more I read the news media, the more disappointed I become. Basic financial advice changes from day to day and even the simple tenets of investing and finance are twisted or even discarded for the sake of selling a few magazines or newspapers.
At the risk of making it too simple, here are some ideas for building wealth:
- Live within your means
- Reduce personal debt
- Buy assets (Stocks, Bonds, Real Estate, Precious Metals)
Of course each of these points can be fleshed out and much more detail can be added to each point. However, I find that when the articles from the “experts” start getting in my head and causing doubt, I look back to these guiding principles for direction.
Do you ever get distracted by the media? If so, what are your strategies for dealing with the constant barrage of information?
Posted in Investment News | 4 Comments »
Friday, March 28th, 2008
I have mentioned in previous articles and on my About Page that I like to use my credit card to manage my monthly cash flow.
Just like mortgages can be used to your advantage, credit cards are another debt tool that can have a positive impact on your personal finances. As with those other tools, credit cards just need to be managed effectively.
Credit Card Rewards
We all know that credit card companies offer various reward systems that are designed to encourage use. To the average person, these are effective in creasing spending and making the card companies money. How do I know that? It’s quite simple. If these reward systems didn’t increase usage and profits, the card companies wouldn’t have them. They are in business to make money…period.
These reward systems can be utilized to your advantage and actually save you more money than if you purchased your item with cash, if you’re smart!
Cash Back Rewards
Cash back rewards are a favorite because of their flexibility and ease of understanding. Other types of “points” rewards systems can be obfuscated with black out dates, minimum redemptions, and other “fine print”.
I would highly suggest finding a credit card with a cash back rewards feature. This will allow you to utilize the rewards as you see fit and prevent any headaches from restrictions of use from other point systems.
How To Use Credit Cards To Manage Cash Flow
One reader has suggested what I believe is a very effective strategy for utilizing credit cards to manage cash flow and increase profits. It is designed to work very effectively if you have the will power to manage your credit wisely and pay your credit card balance in full each month.
Here are the steps to set it up:
1.) Set up your main chequing account with a high interest provider.
(I prefer ING Direct because of ease of use and low fees: Sign Up for ING here.)
2.) Have your employer directly deposit your pay into that high interest account.
3.) Find a good credit card that suits your needs and offers cash rewards.
(You can use this no-cost Credit Card service to find the card that is right for you)
4.) Use your cash rewards credit card for all of your monthly purchases.
(You can even set up your utilities and mortgage to be paid with your card in some cases)
5.) Pay your credit card bill in full from your checking account when it comes due.
Why This Works
This concept works very well because it gives you a full 30 days of interest earning power from your bank account every month before your credit card bill is due. This “float” can add up to hundreds of dollars per year in earned interest and does not cost you one extra penny.
Of course, you must be diligent in paying the bill off as soon as it is due - no earlier and no later. You need to leave it until the last day so that you earn the most interest on the money in your account, but you don’t want to be late or you will be paying those pesky high interest credit card rates.
The Bonus
The bonus to all of this is that you are also building up a cash reward stash that is usually paid on an annual basis from the card company. So, on top of earning extra interest each month from the high interest account, you will also be earning cash back from your credit card purchases.
Many credit cards offer 1% cash back and some even offer 2%. Depending on your spending habits and how diligent you are with your credit card purchases, you can rack up several hundred dollars in cash rewards over the course of a year as well.
This strategy should only be applied if you have a strong command of your spending. However, it can also help you to stay on budget because many card companies offer an online service that allows you to download your credit card statement directly into financial software like MS Money or Quicken.
How do you use your credit cards? Do you have any tips or tricks you would like to share?
Posted in Investment News | 7 Comments »
Tuesday, March 4th, 2008
It appears that I shocked a few people when I wrote about my thoughts on maxing out your student loans to get every penny that you can. Of course, there are the same arguments about other kinds of debt as well. I have received my fair share of email regarding my advice on the use of debt.
Debt is a Tool.
It is that simple.
Loans, mortgages, credit cards etc. These are all tools that, if used correctly, can not only help you manage your cash flow but increase your wealth as well. Yes, debt can be terrible if you can’t control it, but it can also be your best friend if managed correctly.
I already talked to you about the power of using a mortgage as leverage to build wealth and why lenders are more eager to hand out money when it is backed by an asset such as real estate versus consumer debt - like a car loan!
Why is This Article Titled “Student Loan Strategies”?
Well, as mentioned in the previous article on student loans, the student loan is some of the easiest money (debt) that we can obtain as average individuals. It is even easier to obtain than a mortgage because you are not required to prove that you have an established income. The debt is backed by your future earnings - how’s that for pressure!
Anyway, as we get back to the moral of the story and we understand how we can leverage our student loan money so we might graduate without a negative net worth, there is a way to combine the above strategies in order to profit while getting your degree.
Kiss The Dorms Good Bye!
This strategy is directed toward the parents of children who are on their way to college. So, if you are a college student, or about to be one get your parents on the phone!
To the parents…
Your child will have to live somewhere and either you or they will have to foot the bill regardless of where they hang their hat, so why not profit from it?
The strategy is to purchase a house with as many bedrooms and bathrooms as possible in a location that is as close as possible to the university. Yes, you will be renting this house out - but your child will be managing the rental.
College rentals can be unique and very profitable in that it is possible in this situation to rent “by the room”. While most residential real estate rents by the unit or the house, the college market will allow increased returns by renting by the room.
An Example
A 4 bedroom home that would normally rent for say $1000/month as a unit can often be rented by the room in the college market for between $350 and $450/month per room. As you can see the potential for profit is much higher and the potential for your child graduating without a mountain of debt it also greater.
This strategy requires more management as you must collect rent from each person separately instead of collecting one check from the entire house. If you trust your child and they are responsible, this should not be a huge issue as they will be living there to manage the property.
This will also help your child to learn to better manage finances and learn business skills such as management, marketing and basic accounting.
The Benefits
Ideally, the monthly profits (cash flow) from the roommates can cover expenses, repairs, vacancies etc. or may be used to have your child live, essentially, for free!
However, the best part about this strategy is that over the course of the 4-5 years that your child is in college, you will be gaining equity in the home courtesy of your child’s college roommates. This equity can be crystallized by selling the home when the child graduates and using the equity to pay off the student loans for example.
If you have a steady income and a good credit score, buying a house for your child to live in while going to college is typically a sound strategy.
If you don’t know if you have good credit or not, you can check out your credit score for free at Experian.
The Kicker
If you have more than one child that attends the same university, this strategy can have a compounding effect as the younger ones enter school and the rooms continue to be rented out, your equity grows and grows.
If you are fortunate enough to realize a substantial capital gain along with your home equity, you executed this strategy exactly as my good friend and his parents did when I attended college. I only wish my parents and I could have undertaken this strategy instead of paying off someone else’s house!
I hope you enjoyed this example and are able to benefit from it. I share this with you, not because I profited from it, but because I was a victim of it! If it helps your child start their professional life without the same $40,000 in student loan debt that I had, then it has been worth the time to write this article.
Stay tuned later this week when I will tell you a story about what I learned from falling victim to this strategy and how it catapulted my net worth right out of college!
Posted in Debt | 8 Comments »
Monday, February 25th, 2008
In a previous post I wrote about how I manage debt and how I believe that making payments on a car loan is the absolute worst financial move I could make. I also talked a little about how I use a credit card to manage my monthly cash flows and the advantages that I receive from it.
Along these lines, I must convey a story about my brother that just recently happened. This is not fiction and is the honest truth. First off, let me say that my brother is the exact financial opposite of myself. He is out for one thing and one thing only - to spend all, and more, of the money he makes!
On With the story.
My brother recently decided that his 2001 Chevy truck was costing him too much money in fuel and maintenance costs - not to mention the $400/month payments he was making on his loan that he is upside down on (he owes more than the truck is worth). So, he decided that it was in his best interest to sell the truck.
I said “Good Idea”!
He then proceeded to sell the truck and even went a couple of weeks without a vehicle. I thought that maybe he had changed and that he was going to purchase an older, more reliable vehicle that he could afford. He even mentioned to me that he found a grandmother with a 1991 Ford Tempo that had very few miles on it and she would sell it for around $1500.
I said “that would be a great idea”!
At this point I really thought that he had changed and I started to feel proud of myself. I thought that my explanation to him about how he couldn’t get a mortgage for a house that he desperately wanted if he had to make lofty monthly car payments had finally hit home.
The Call Came
I received a phone call from my brother and I could tell that he was very excited on the other end.
Me: “So did you buy the car”?
Him: “Even better, I got a 2005 Chrysler 300 for $3000 less than market price”!
Me: “That’s great, so you can sell it and make about $3000 toward a down payment for a house”.
Him:“Well, I just talked to the loans guy at the Credit Union and he said that since I just started a new job I wouldn’t be able to get a mortgage for a couple of years anyway, so I might as well drive a sweet car”. He didn’t even ask the loans officer how he could improve his credit score in order to qualify for a better rate on his loan. In fact he doesn’t even know what his credit score is!
If you live in the United States and you don’t know what your credit score is, you can find out for free from Experian.
Me: “Sigh…Well if that is more important to you than buying a house (sarcasm here)”.
My soul fell directly to my boots as I realized that my “talk” had not sunk in and he had certainly not changed. He has continued to run on the Car Loan Treadmill and I’m saddened to say that he will likely never get off of it.
I have had several conversations explaining to him the basics of personal finance to no avail. He continuously declares that he wants to save money, have an emergency fund and buy a house, but he refuses to follow even the most basic rule of spending less than you earn.
Moral of the Story
If you spend more than you earn and owe more than you own (negative net worth), you will not be wealthy.
Posted in Investor Education | 1 Comment »
Thursday, January 31st, 2008
Life may have a few surprising twists and turns that can lead you up a financial spout; however, there are a few ways of keeping you, your family and your possessions protected against such mishaps. Purchasing an insurance policy is a worthy investment. Here are three basic types to think about.
Car Insurance
It is crucial that you act as a responsible driver and have the correct type of car insurance. This can get you out of all sorts of trouble: roadside breakdowns, crashes, scrapes and scratches to the bodywork of your car, and can also step-up in the event of legal confrontations and debates. Careful planning beforehand means you don’t have to pay a hefty cost afterwards, so it is well-worth taking care of these administrative extras for a smoother ride through life. Don’t try to save money by cutting corners on the policy instead it’s a good idea to look out for online discounts. The Co-operative bank, for instance, offer a 10% discount on car insurance quotes to online customers.
Home Insurance
Home insurance is needed to protect not only the bricks and mortar of your house or flat, but also its contents. There are practical ways to reduce the cost of a home insurance premium, for example, you can fit a recognised burglar alarm, or, if you are over 50 you can save up to a third on home insurance with RIAS.
Life Insurance
This is basically a way of looking after and protecting loved ones in the event of your death. However, it can also be used as a fruitful investment you can dip into during your lifetime depending on the type of policy you choose. For example, the investment type can be cashed in at any point, helping you pay off unexpected debts such as mortgages, university fees, and medical bills, which can be a huge hill to climb if you suddenly lose your job. An investment plan can provide emergency financial aid when needed. Check out the Department for Work and Pensions for help in planning your future with financial suss.
Posted in Investment News | No Comments »
