In my last few columns I have discussed step 2 of Dave Ramsey's 7 Baby Steps (see http://www.daveramsey.com/new/baby-steps/). I love talking about getting out of and avoiding debt because it is an essential prerequisite for financial success. Now I think it's time to move on to other topics that cover what should happen after getting out of debt. Baby Step 3 is to build 3 to 6 months of expenses in savings, but I have discussed this step in previous columns.
In this column I will address 3 questions regarding Baby Step 4, which is to save 15% of income toward retirement.
Why should I wait until I'm out of debt with an emergency fund before saving for retirement? The answer is simple: FOCUS! You're not going to gain traction if you try to do too much at once. It is true that saving for retirement is very important, and the earlier you start the better, but I am only recommending that you put off retirement savings temporarily. With focus and discipline, the average family takes 18 to 24 months to complete Baby Steps 1 through 3. Once you are free from income-eating debt payments and have an emergency fund to prevent you from going back into debt, you will be in a great position to contribute to retirement.
Why 15%? 15% is not a magic number, but it's enough to make good progress toward retirement but not so much that it's a huge burden. Some of you will want to save less, but I encourage you to stretch yourself to reach this goal. Some of you will want to save more, but I encourage you to dial back unless you have a lot of extra money. Take anything extra you have above 15% and apply it to the next baby steps - fund kids' college, pay off your house early, build wealth in other ways (i.e. real estate), give money away, and yes, even spend some of it!
Where should I put the money? Definitely use a Registered Retirement Savings Plan (RRSP) and/or a Tax-Free Savings Account (TFSA). Both of these provide significant tax advantages. An RRSP allows you to invest pre-tax dollars (what you contribute is a tax deduction) but you are taxed on any withdrawals. A TFSA allows you to invest after-tax dollars (no tax deduction), but the withdrawals in retirement are tax free. If you have the same tax rate now as in retirement, the end result is exactly the same. Of course, we have no idea what our tax rate will be in retirement, so it's best to talk through your options with an advisor. You can think of an RRSP or TFSA as a blanket that protects your investments from taxes, but they are not the investments themselves. Even if you use an investment advisor, such as at a bank, make sure you understand what your RRSP or TFSA is invested in.
There is much to talk about on the subject of retirement planning, but I will leave it at that for this column. If you have any questions or topics you want me to address, please email me
Thursday, May 27, 2010
Thursday, May 13, 2010
Baby Step 2 - School Without Student Loans (Part 2)
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/), and last time I made the case that it's actually possibly to get through school without student loans. This week I will continue on that theme in answer to the question, “what's wrong with student loans?” Two principles I would like to discuss are (1) student loans, like any debt, can take the place of creativity and sacrifice, and (2) students loans for most people are NOT easy to pay off.
Simply put, students loans make it too easy. That may not sound like a bad thing, but it is bad when you're trading short-term ease for long-term pain (refer to principle number 2). There's nothing wrong with being a starving student living in a small apartment getting around in an old car. In fact, learning financial discipline and sacrifice as a student will prepare your character to handle prosperity in the future.
For some people the only possible way to get an education might be to take out a minimal loan and use it for the bare necessities. However, few of us have that kind of discipline. If you need $5000 to cover the bare necessities, why not take out $5500 and eat out a little more often? Why not take out $7500 and live in a little nicer apartment? Why not take out $10,000 and buy a big-screen TV and nice couch? Someone I talked to recently admitted that he spent more student loan money on CD's and stereo equipment (you can tell he went to school a few years ago) than he did on his education.
The second principle is that student loans are NOT easy to pay off. The average university student graduates with around $20,000 in debt. Starting salaries vary widely by profession and location, but somewhere around $45,000 is probably somewhere in the middle of the range for a bachelor degree. That might sound like decent money, but a typical one-income family will have trouble finding extra money for student loan payments after taxes and the many other expenses of life.
If the average student loan is $20,000, and a typical interest rate is around 6%, here are some examples of how long it would take to pay it off. $150/month: 18 years. $250/month: 8 years. $750/month: 2.5 years. $1000/month: almost 2 years. You might think that 2 years doesn't sound too bad, but even if you could spare $1000/month right out of college (not very likely), think of what else you could do with that $1000/month.
You could save for a $24,000 down payment on a house, you could buy a nice vehicle, or my personal favorite, you could invest it for 2 years. If you invested at a 10% return (if you starting investing a year ago, your return would have been more like 50-80%), it would become $26,500 in 2 years. If you just left that $26,500 in investments at 10%/year (the average stock market return over a long period of time) and did no other investing for the rest of your life, you would be a millionaire when you retire in 40 years ($1.2 million to be exact).
Are those extra comforts while attending school worth $1.2 million? I'll leave that up to you to decide.
If you have any questions or topics you want me to address, please email me!
Simply put, students loans make it too easy. That may not sound like a bad thing, but it is bad when you're trading short-term ease for long-term pain (refer to principle number 2). There's nothing wrong with being a starving student living in a small apartment getting around in an old car. In fact, learning financial discipline and sacrifice as a student will prepare your character to handle prosperity in the future.
For some people the only possible way to get an education might be to take out a minimal loan and use it for the bare necessities. However, few of us have that kind of discipline. If you need $5000 to cover the bare necessities, why not take out $5500 and eat out a little more often? Why not take out $7500 and live in a little nicer apartment? Why not take out $10,000 and buy a big-screen TV and nice couch? Someone I talked to recently admitted that he spent more student loan money on CD's and stereo equipment (you can tell he went to school a few years ago) than he did on his education.
The second principle is that student loans are NOT easy to pay off. The average university student graduates with around $20,000 in debt. Starting salaries vary widely by profession and location, but somewhere around $45,000 is probably somewhere in the middle of the range for a bachelor degree. That might sound like decent money, but a typical one-income family will have trouble finding extra money for student loan payments after taxes and the many other expenses of life.
If the average student loan is $20,000, and a typical interest rate is around 6%, here are some examples of how long it would take to pay it off. $150/month: 18 years. $250/month: 8 years. $750/month: 2.5 years. $1000/month: almost 2 years. You might think that 2 years doesn't sound too bad, but even if you could spare $1000/month right out of college (not very likely), think of what else you could do with that $1000/month.
You could save for a $24,000 down payment on a house, you could buy a nice vehicle, or my personal favorite, you could invest it for 2 years. If you invested at a 10% return (if you starting investing a year ago, your return would have been more like 50-80%), it would become $26,500 in 2 years. If you just left that $26,500 in investments at 10%/year (the average stock market return over a long period of time) and did no other investing for the rest of your life, you would be a millionaire when you retire in 40 years ($1.2 million to be exact).
Are those extra comforts while attending school worth $1.2 million? I'll leave that up to you to decide.
If you have any questions or topics you want me to address, please email me!
Tuesday, May 4, 2010
Canada-US Differences
An FPU class member requested a summary of main differences between Canada and the US as covered in FPU. I thought this was a great idea, so I am sending it to everyone who is taking or has taken the class.
All of the underlying financial principles are the same, but there are some differences in applying these principles. I'm not an expert in any of these areas, so please correct me if anything I've mentioned is not accurate.
Dumping Debt
- Visa and Mastercard debit cards are not offered by every Canadian bank. 1st Choice Savings Credit Union is the only bank in Cardston that offers one (Global Payment Mastercard)
Credit Bureaus
- It's not quite as easy to get a free annual credit report from credit bureaus in Canada, but it is possible by following instructions on the credit bureau websites (www.Transunion.ca and www.Experian.ca)
- Unlike the federal Fair Debt Collections Practices Act in the US, debt collection practices are governed by each province in Canada. Information about Alberta can be found here: http://www.
Retirement Planning
- IRA, SEPP, 401(k), 403(b), 457 (US) = RRSP (much simpler in Canada!)
- No penalty for withdrawing from an RRSP (10% penalty on most US plans) unless the underlying investment has a withdrawal penalty (such as a GIC), but withdrawal is taxed as income
- One spouse can contribute to the others RRSP and still get the tax break (spousal RRSP)
- Roth IRA, Roth 401(k) (US) = Tax-free Savings Account (TFSA) (Canada)
College Savings
- ESA, UTMA, 529 (US) = RESP (Canada)
- Unlike ESA's, RESP's are not tax free, but the government does match 20% of contributions up to $2500 per year (contribute $2500, get $500 for free)
Real Estate and Mortgages
- Mortgage interest is not tax deductible in Canada
- No limit on tax-free gain on sale of primary residence in Canada
- Mortgage insurance in US is normally paid monthly and can be dropped when equity is more than 20%. Mortgage insurance in Canada (CMHC) is normally paid in full up front, either in cash or added to mortgage principal.
- We don't have the different types of mortgages - FNMA, HUD, VA
- Mortgage amortization periods and other options are far different in Canada, but there are too many options to list here. The biggest difference is that the common 30-year, fixed-rate, no prepayment penalty mortgage is not available in Canada.
Thursday, April 29, 2010
Baby Step 2 - School Without Student Loans (Part 1)
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). This week I will answer the question, “how it is possible to get an education without student loans?” Believe it or not, it is possible to get a good education without student loans. For some, student loans are avoidable because of parents or full-ride scholarships. For the rest of us, they can be avoided through hard work, discipline, and sacrifice.
One of the best ways to pay for an education is to work part-time while going to school and full-time during the summer. Studies have shown that students who work up to 20 hours per week while going to school full-time actually get better grades than those who don't work. If you have a part-time job, you will be forced to make your study time focused and effective. If you have all day to study, it's easy to put off studying and find more fun ways to fill your time.
There are many side benefits to working while going to school, such as learning good time management skills and gaining real world experience. I strongly suggest finding work related to your area of study. Those who work during school will find it much easier to find a job after graduating because employers will look for experience in addition to education.
It is also important to work hard for scholarships, which involves getting good grades and applying for every possible scholarship. Getting good grades has a lot to do with hard work and little to do with natural brains. Many schools give full tuition scholarships based mainly on grades, and depending on the school, this could save you $15,000 to $30,000 or more over 4 years.
Do you want to earn several hundred dollars per hour? There is a good chance that the time you spend searching, applying, and writing essays for scholarships will pay off that much. There are many scholarships based on criteria other than grades, and many scholarships even go to those who don't quite meet the criteria because they are the only ones who apply! For two years I received $750 each semester because I found an obscure scholarship for those working for entrepreneurial companies. No one else applied, so I got it every time!
In addition to earning money through work and scholarships, it is also important to conserve money by following a strict budget. The danger of student loans, like any debt, is that they can take the place of creativity and sacrifice. There's nothing wrong with the character-building process of being a starving student. Figure out a budget for the bare minimum you need to survive, and stick to it. If you work hard and sacrifice, chances are you will be able to get through school without student loans. The reward of graduating debt-free will be well worth the effort!
If you have any questions you want me to address in my next column about avoiding student loans or about any personal finance topic, please email me!
One of the best ways to pay for an education is to work part-time while going to school and full-time during the summer. Studies have shown that students who work up to 20 hours per week while going to school full-time actually get better grades than those who don't work. If you have a part-time job, you will be forced to make your study time focused and effective. If you have all day to study, it's easy to put off studying and find more fun ways to fill your time.
There are many side benefits to working while going to school, such as learning good time management skills and gaining real world experience. I strongly suggest finding work related to your area of study. Those who work during school will find it much easier to find a job after graduating because employers will look for experience in addition to education.
It is also important to work hard for scholarships, which involves getting good grades and applying for every possible scholarship. Getting good grades has a lot to do with hard work and little to do with natural brains. Many schools give full tuition scholarships based mainly on grades, and depending on the school, this could save you $15,000 to $30,000 or more over 4 years.
Do you want to earn several hundred dollars per hour? There is a good chance that the time you spend searching, applying, and writing essays for scholarships will pay off that much. There are many scholarships based on criteria other than grades, and many scholarships even go to those who don't quite meet the criteria because they are the only ones who apply! For two years I received $750 each semester because I found an obscure scholarship for those working for entrepreneurial companies. No one else applied, so I got it every time!
In addition to earning money through work and scholarships, it is also important to conserve money by following a strict budget. The danger of student loans, like any debt, is that they can take the place of creativity and sacrifice. There's nothing wrong with the character-building process of being a starving student. Figure out a budget for the bare minimum you need to survive, and stick to it. If you work hard and sacrifice, chances are you will be able to get through school without student loans. The reward of graduating debt-free will be well worth the effort!
If you have any questions you want me to address in my next column about avoiding student loans or about any personal finance topic, please email me!
Thursday, April 15, 2010
Baby Step 2 - Living Without Auto Loans
In my last few columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I will continue on my anti-debt soapbox this week because I love to hate debt so much. I promise - I will eventually move on to other topics. The question this week is, "how do I get a car without a loan?" Believe it or not, it is possible to live without a car payment. The key here is distinguishing between wants and needs. You might want a car that turns heads on Main Street, but you probably just need a car that will start in the morning and get you to work safely.
If you are really starting from scratch (and most of you aren't, so it will be even easier than this scenario), you can find a car that runs for $1000 or less, which most people could come up with fairly quickly. I'm not suggesting you drive a $1000 beater forever. The average car payment is around $500/month. Let's say that instead of having a debt payment, which includes a lot of interest, you put $500/month into a savings account. Within a year you could pay $6000 cash plus proceeds from the beater for quite a respectable car. Another year would give you $12,000, and so on until within five years (the average length of a car loan) you could pay almost $30,000 cash for a car that would turn heads.
5 years of $500/month payments at an 8% interest rate could purchase a $24,659.22 car, which means having a car payment cost you over $5000 in interest during that time. Furthermore, the average person will finance another car for another 5 years at the end of the loan term, thus continuing a lifetime cycle of car payments. If you put that $1000/year toward retirement savings at 10%/year instead of interest to the bank, you would have almost $500,000 extra after 40 years. Why not sacrifice for a short time and save your family from a lifetime of car payments that eat away at your ability to build wealth?
If you have any questions or comments, please email me!
I will continue on my anti-debt soapbox this week because I love to hate debt so much. I promise - I will eventually move on to other topics. The question this week is, "how do I get a car without a loan?" Believe it or not, it is possible to live without a car payment. The key here is distinguishing between wants and needs. You might want a car that turns heads on Main Street, but you probably just need a car that will start in the morning and get you to work safely.
If you are really starting from scratch (and most of you aren't, so it will be even easier than this scenario), you can find a car that runs for $1000 or less, which most people could come up with fairly quickly. I'm not suggesting you drive a $1000 beater forever. The average car payment is around $500/month. Let's say that instead of having a debt payment, which includes a lot of interest, you put $500/month into a savings account. Within a year you could pay $6000 cash plus proceeds from the beater for quite a respectable car. Another year would give you $12,000, and so on until within five years (the average length of a car loan) you could pay almost $30,000 cash for a car that would turn heads.
5 years of $500/month payments at an 8% interest rate could purchase a $24,659.22 car, which means having a car payment cost you over $5000 in interest during that time. Furthermore, the average person will finance another car for another 5 years at the end of the loan term, thus continuing a lifetime cycle of car payments. If you put that $1000/year toward retirement savings at 10%/year instead of interest to the bank, you would have almost $500,000 extra after 40 years. Why not sacrifice for a short time and save your family from a lifetime of car payments that eat away at your ability to build wealth?
If you have any questions or comments, please email me!
Thursday, April 1, 2010
Baby Step 2 - What's Wrong With Debt?
In my last couple of columns I have discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
Step 2, getting out of debt, gives me so much to talk about that I would like to continue on the subject in answer to the question, "why is debt so bad?" I don't profess to have all the answers or that my opinion is the only correct one. However, I do hope you at least take a step back and consider the impact debt is having (if you are in debt) or will have (if you're considering going into debt) on your life. Especially consider how debt adds risk (and stress) to your life.
Consider how many financial risks we face in life that we can't always avoid, such as serious injury or illness and job loss. Such unfortunate events can cause us serious hardship if don't have debt, but those hardships are compounded when debt is in the picture. In addition to worrying about the essentials of life, such as food, clothing, transportation, and shelter, what if we also had to figure out how to pay that $700/month car payment, $400/month minimum credit card payment, an $200/month furniture payment? In that moment we would gladly take back our hand-me-down furniture and reliable but not-so-flashy, 10-year-old car. When we are having trouble putting food on the table, we would regret that great vacation we charged to our credit card.
Don't get me wrong - I'm not saying that we should live in paranoia of something bad happening and not enjoy life. However, I am saying that we should distinguish between our needs and our wants and enjoy our wants when we are financially ready to enjoy them. It is my opinion and experience that the first 4 baby steps should come before expensive wants: start with $1000, get out of debt, get 3-6 months of expenses in savings, and contribute 15% of your income to RRSP's. After that you can balance extra money to fund kids college, pay off your house early, build wealth, give, and save to pay cash for your wants. Take a nice vacation. Buy a nice car. There's nothing wrong with that - if you have the cash and you've taken care of more important things first. This is one of my favorite Dave Ramsey quotes: "Children do what feels good. Adults devise a plan and stick to it."
If you have any questions or comments, please email me
Consider how many financial risks we face in life that we can't always avoid, such as serious injury or illness and job loss. Such unfortunate events can cause us serious hardship if don't have debt, but those hardships are compounded when debt is in the picture. In addition to worrying about the essentials of life, such as food, clothing, transportation, and shelter, what if we also had to figure out how to pay that $700/month car payment, $400/month minimum credit card payment, an $200/month furniture payment? In that moment we would gladly take back our hand-me-down furniture and reliable but not-so-flashy, 10-year-old car. When we are having trouble putting food on the table, we would regret that great vacation we charged to our credit card.
Don't get me wrong - I'm not saying that we should live in paranoia of something bad happening and not enjoy life. However, I am saying that we should distinguish between our needs and our wants and enjoy our wants when we are financially ready to enjoy them. It is my opinion and experience that the first 4 baby steps should come before expensive wants: start with $1000, get out of debt, get 3-6 months of expenses in savings, and contribute 15% of your income to RRSP's. After that you can balance extra money to fund kids college, pay off your house early, build wealth, give, and save to pay cash for your wants. Take a nice vacation. Buy a nice car. There's nothing wrong with that - if you have the cash and you've taken care of more important things first. This is one of my favorite Dave Ramsey quotes: "Children do what feels good. Adults devise a plan and stick to it."
If you have any questions or comments, please email me
Thursday, March 18, 2010
Baby Step 2 - Getting out of Debt (again)
In my last column I discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!
But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.
But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!
But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.
As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!
If you have any questions or comments, please email me!
I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!
But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.
But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!
But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.
As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!
If you have any questions or comments, please email me!
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