Archive for September, 2010

By Sue Ricketts, I.C.I.A.

     Research House did a survey in mid-summer 2010 to find out what Canadians felt was the most important goal they had regarding finances. The survey was commissioned by Manulife Bank and the result was that over 69% wanted debt freedom more than anything else. That’s despite having had low interest rates for the last decade.

     Nearly 7 out of 10 people said they felt that becoming debt-free was the number one goal. The survey showed clearly that nearly 3 in 10 (29%) had their debt increase in the last past year. That was up 2 % from the April survey. Another 17 % saw no change in their debt, while a full 16% said they had reduced their debts but not as much as they would have like. Only 8% said they whittled down their debt more than expected over the last year. It’s obvious there is a disconnect for most people between what their ideals are and the facts.

 Debt Freedom Matters – The Wish

 Debt Increased Last Year – The Fact

 Debt Stayed the Same – The Fact

 Debt Decreased Last Year – The Fact

     If that’s the wayyour financial plans seem to be, you should be looking to talk to a financial advisor who can explain to you some of the advantages of changing how you are currently managing money. Most people use a standard bank (or two or three) to hold chequing and saving accounts and pay their bills with a combination of cheques, automatic payments, credit cards and sometimes even cash. All of their debts are at different rates and come due at different times of the month or year. It’s a constant juggling match just to keep track of their financial “system” because it is fragmented in too many places for them to be able to hold a firm picture of what is going into and out of their household during even a short period. Often people just give up and let someone else, usually their spouse, handle the money and have no idea how close or how far they are along the way to being debt free. Yet they still maintain that being debt free is their goal.

     The other mistake people make is that they arrange their debt so that they are paying compound semi-annual interest on the largest amounts. Compound interest means that you are paying interest on the previous interest charges. That is definitely not the best way to manage your money. Paying more than necessary is just wrong. Did you know there is an alternative? If you have some ownership in your major assets you can arrange to pay straight interest – interest only on the outstanding principal loaned to you.

       If this sounds familiar, you may need a change in how you do things. This is not the right way to handle your affairs. You should be your own banker. Your a grownup now, and you should learn how to be in charge of your own affairs. If you were able to clearly and easily see exactly what your debt, spending, savings and investments were each and every month, would that be an advantage to you in getting debt free sooner? I firmly believe so and that is only part of what I discuss with my clients when we get together.

Give me a call or send me an email. I’m here with Simply Practical Advice.               

Purchase of a new residence

By Sue Ricketts

       Steve and Laura where engaged to be married in June next year. They spent a lot of time together, and apart, dreaming about what their lives would be like when they finally tied the knot. They both wanted to have a big family and thought that 4 or 5 kids would be great. They agreed that they would both work for 5 or 6 years and then Laura would take time off to be a full time Mom when the first little one arrived.

     At the Engagement party, Laura’s uncle offered to take them out to start looking at homes. No pressure at all. He showed them three places. The first two were very old, small and had no yards or park nearby. The last one was 10 years old, completely up to date and had swings and a small pool in the yard. There were four bedrooms and they could finish the basement and a deck themselves. They fell in love with the home immediately. It was a little over their budget but still possible if they saved and didn’t buy new furniture etc. There was an offer being put in the day after tomorrow and if they really wanted this house they would have to decide quickly.

     They were just starry eyed and made an offer which was signed back at another $25,000 more by the sellers. Uncle James reminded them that $25,000 over a 25 year mortgage was $1,000 a year. He would arrange a three year mortgage and they could put 5% down which was all of their combined savings and most of Laura’s RRSP money she’d been setting aside. The closing date was in six months.

     Laura and Steve never really made a budget. Before they made the offer on the property they didn’t think seriously about all of their living expenses and whether or not they could afford to have the dream home and still have the other dreams about a family. Retirement was way, way off in the future and they would worry about that when the time came.

     Steve moved in with dishes and a mattress when the time came and they began to shop garage sales and auctions to furnish the beautiful new house. They both worked hard and never missed a payment in the first three years of their mortgage. They even managed to pay extra money to give themselves more equity. They now had 28% equity in their home which became their pride and joy and contained many “antiques” collected over the years.

     Come renewal time, they were dismayed to learn that interest rates were 3% higher for mortgages. Property taxes had gone up as the neighbourhood was expanding and sewer and water infrastructure were being replaced. This meant an increase of $400 per month to the housing costs making it unlikely that they could put any extra money into the house because there were car loans and student loans and credit cards to pay, all at higher interest rates than the mortgage.

     This meant that Laura’s income had to continue to come in if they wanted to keep the dream home. They bitterly faced the fact that they must postpone dreams of a family for some time into the future or give up their dream home. There seemed no prospect of Laura ever being a stay at home Mom. Now there were no savings for retirement and no savings for a rainy day either. What if either of them got sick or injured and couldn’t work? They would lose it all.

     The resentment of not being able to fulfil their dreams caused friction and they began to argue about other things. Their happy dreams for a family seemed further and further from reality. They began to turn against each other and spend much less time doing things together. This wasn’t the happy marriage they dreamed about.

 How could this have been prevented?

•  They should have agreed on a plan with dollar amounts in it for housing before looking at any properties. The budget should have included Disability benefits and retirement savings as a priority. Never take on debt which means depleting all savings and retirement money.
• Use a budget/ accounting program which shows what would happen if they added another payment to their expenses.
• They were manipulated into buying more than they needed. A four bedroom house with a pool was far above the needs of two people.
• Open discussion of money issues between part5ners should have been part of their marriage plans from the very beginning and planning together how to achieve their dreams should have been a priority which would keep them both inspired and give them goals to work for. 
• Always take into account that fixed expenses like a mortgage, utilities, food etc. can and will, likely go up in the future. Make sure your income will cover it.

Purchase of Consumer Durables

By Sue Ricketts

     Jane and Mary were sisters who had both finally finished with school and had jobs of their own. They lived together in a cozy 2 bedroom apartment in the basement of their parents home and paid rent of $300 each per month. The only problem was that all of the furniture and appliances were hand-me-downs that had seen far too many years of service. It was really kind of embarrassing to bring friends home to see where they lived.

     Between them there was after tax income of just over $4,000 per month. When they decided to stay at home. Their parents had agreed to have a separate entrance and a large window put in. The sisters agreed to make the loan payments of $225 per month for five years. Their other expense was car loans payments which came to $218 each a month

     The girls were out driving one day past the major strip mall and spotted a large nation-wide furniture store with “Don’t make a Payment Until” signs out front. What would it hurt to take a look? Two hours later they had picked out 5 appliances, two bedroom suites, a dining room set and a complete living room suite with a 43” flat screen TV. Total cost $3,400 plus tax. They’d got the sales people to give them the TV free since they had bought so much.

They were presented with three offers:

1. Take a five year loan at $131.47 per month and 2.75% interest per month.

2. Two years no payment which meant they had to save $167,04 per month for 23 months to pay off their purchase before the 2 years were up

3. Go to their own bank and take a 3 year loan at 12% annual interest at $127.00 per month

Which one should they choose and why?

Which one will they likely choose and why?

Solution:

Interest paid on 60 month loan $4,046.20                                               Total repaid $7,888.20

 Interest paid on 3 year loan           $751.59                                                Total repaid $4,593.59

Interest earned on savings @ 1.00 per yr approx $387.24             Total repaid $3842.00

      I let you draw your own conclusions as to which they will chose. Most commonly people will take the line of least resistance and accept the furniture company offer of 2 years no payment and may or may not set aside the money required to cover the debt at the end. The best course financially would be to save the money monthly and earn interest over 23 months. Discipline in financial matters pays off.

By Sue Ricketts

     Being a tax assessor for the government with a photographic memory was both a curse and a blessing. A curse because the higher-ups knew about it and everyone turned to her whenever there was a question about what the facts were. A blessing because she never had to go back and look at files, they just appeared in her mind whenever she needed to fit the facts into any picture.

     Although Bernadine, better known by her co-workers as Berny the Brain, was respected, not many of them would spend time with her outside the office. She might catch them in the little white lies that people tell all the time. She would know if they really meant I wish I had done this or that, instead of just telling a story which made themselves the hero. It was annoying enough when she corrected them about computer files and papers at work. If they forgot details she would instantly recall them and show them up by reminding them. Or at least that’s what they thought she was doing. They sure didn’t want to hang out with someone who’d do that all the time.

     Berny wanted very, very much to find someone who would like her and stay with her and understand that she just couldn’t forget things. Her mind seemed able to expand exponentially and never became too full to add more memories. She knew that most people thought that they had a limit. Most people forgot things and just didn’t stay consistent.

     Although her job paid well and she had all the comforts she would ever need, she wanted to have someone to lean on when she felt lonely, someone who would never leave her, someone who would understand her.

     She was good looking and there was no lack of offers for physical companionship – one night at a time. They just never seemed to stay. She thought seriously for a while about cheating on the birth control pills and having a baby. Not to trap anyone, but then she’d have that treasured companion who would stay with her. But for how long? A child would leave her to go out into the world eventually. If they didn’t they wouldn’t be a very good companion. They’d be damaged in some way.

     Life drifted along for a while and one day she was given some information about a tax cheat who had come up with a very creative way to jigger the books so that his embezzlement was almost impossible to discover. The info came on her computer and she spent weeks trying to piece together the clues which came from the periodic auditors reports which she was charged with reviewing. It was her job to make an airtight case for the government to indict the fraudster and put him in jail and fine him and his superiors at the bank who had not done their job. Every time she thought she had the case wrapped up, new information came through which needed to be added and reviewed and folded into the case in a logical order.

     As time went on this one case became an obsession and she spent more and more time trying to get all the facts in place. Two years later it still wasn’t finished. New names and details kept coming in. One night as her co-workers left the building she stayed late, piecing things together. In the distance she heard a cell phone ringing. It rang five times and then stopped. A couple minutes later it rang again. This went on for some time and finally she decided to go find it and either answer it or shut it off.

     The cell had been left in a cubical three doors down from hers in it’s charger. When she looked she saw that the same number had been making all the calls. After it started ringing another couple of times she was curious enough that she picked it up and grunted noncommittally. The voice on the other end was one of those who worked on the floor below. She knew it because he had a slight lisp. He didn’t wait to hear who had answered. He just said, “Dammit! Why didn’t you upload that file to Berny Brain’s computer before you left? How can we keep this going if you don’t carry your part of the joke. Now she’ll be back looking over our shoulders and telling the boss what we’re doing wrong or what we’ve missed.”

     That sure hurt. She went back to her office and sat there feeling uncontrollable tears run down her cheeks. How could these people who spent so much time with her think so badly of her? Was she some kind of joke to them? A freak? Once again she was the weird outsider and not part of the group.

     Berny couldn’t concentrate any more and she put on her coat and walked out to the parking garage and drove around aimlessly while she thought about the two year joke to keep her away from them. That night she didn’t have supper and when she did finally go home it was to a dark and empty place. No one to talk things over with. No one to help distract her from how very lonely she was. She fell into a restless sleep of exhaustion and woke with a start at 5:45 sharp.

     What had wakened her? Something was odd. Something was different. After a few minutes she realized that she had come to a decision. She knew what she would do. Berny got up and made herself some coffee and walked around her beautifully decorated apartment and stood at the huge picture window with the french doors leading out to the wide balcony high above the city. The view was spectacular! She could see for miles. When she stood at the right spot, to the left was a view of the Rocky Mountains with a bit of snow capping their tops. On her right was a view between two buildings of the harbour dotted with sailboats. The sun was just beginning to rise so that the snow caps were turning red and the sails on the boats were turning a paler shade of pink as the sky lightened. A most splendid view. A new beginning.

     Now that she had made her decision, she fixed herself breakfast. Lots of food which she ate hungrily. When eight-thirty finally arrived she picked up her phone and called the University and waited impatiently until she got Dr. Schizari on the line. “Uncle Shiz. I know that you installed your memory connection in my head a long time ago. I want you to make that computer talk to me. I need a friend. A companion who will never leave me. I need to be understood. I don’t want to be alone any more. Can you make me a companion?”