Debt & Frugality

As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”

New Millennial parents need to prepare for the future

Posted By Financial Independence Hub | June 18, 2019

By Donna Johnson

Special to the Financial Independence Hub

One of the most exciting events in most people’s lives is becoming a parent. Those who are currently bringing new kids into the world tend to fall into the Millennial generation, which includes people born between 1981 and 1996. These parents need to be prepared for many things they may not be ready for. Having a home security system is a good idea, but there are also many other financial considerations to take into account.

Kids are expensive

The cost of raising a kid is now estimated to be around US$233,000. That’s just until they are 18. Therefore, Millennial parents can expect to pay more than $12,000 per year for their little bundles of joy. Of course, there are ways to avoid some of these costs, like skipping out on day care costs by having one parent stay home until the child goes to school and buying clothes at thrift stores. Additionally, family members like grandparents might be willing to watch kids for a reduced fee, if they charge anything at all. Regardless, there are costs that come with having a child, and new parents should be prepared for them.

It’s important to get your documents together

Many parents fail to adequately prepare for the future. No one wants to die before their kids reach adulthood. However, there is always that possibility. Therefore, taking out a solid life insurance policy is a good idea. Also, setting up a will that indicates where the kids should go in the event that both parents die or become incapacitated will help ensure that the children stay out of the foster system.

College is coming up

Those who have a child this year will likely have between 18 and 19 years to get ready for college expenses. As of 2018, a year at a public four-year school at the in-state tuition rate averaged US$20,770, while a year at a private school costs just under US$47,000. Continue Reading…

Student Debt remains even after Bankruptcy: Study

Posted By Financial Independence Hub | June 11, 2019

By Mike Brown

Special to the Financial Independence Hub

Student loan debt in the United States is a rapidly developing issue for consumers. More than 44 million Americans owe around US$1.5 trillion in student loan debt; that figure means student loan debt only trails credit card debt when it comes to the highest forms of outstanding debt.

However, student loan debt is one form of debt that is virtually impossible to discharge in bankruptcy whereas debts from things like credit cards or automobiles can be discharged much more easily.

To look at bankruptcy figures in regards to student debt, we used exclusive anonymized data provided by Upsolve, a non-profit that assists low-income individuals file for Chapter 7 bankruptcy free of charge. This data was then analyzed to discover what percentage of bankruptcy filers carry student loan debt and what percent of their total debt is comprised of student loan debt.

How many Bankruptcy filers also carry Student Loan debt?

According to the anonymized bankruptcy data provided by Upsolve and analyzed by LendEDU, 32% of all bankruptcy filers also carried some amount of student loan debt.

Further, for these filers with student loan debt, the vast majority of their liabilities totaled is solely from those student loans. On average, student loan debt takes up 49% of this group’s debt. Even including all consumers, those with and without student debt, student loan debt still takes up 21% of all Upsolve user debt.

Filing for Chapter 7 bankruptcy will liquidate a consumer’s total assets and utilize the subsequent funds to pay off as much outstanding debt as possible. According to the data, essentially one-third of consumers who do declare bankruptcy also have student loan debt, and Chapter 7 will not allow for the offloading of this student debt.

Additionally, due to student debt being almost 50% of all debts incurred by that individual, the person can successfully declare Chapter 7 bankruptcy and still have close to 50% of their debts remaining.

Rather than a restart on one’s financial life, which is the point of bankruptcy, only half of their debt discharges and they are still left having to pay off the other half. Since the data shows that student loan debt is such a huge component of the financial situation for nearly one-third of bankruptcy filers, there appears to be a nonsensical policy in place at the moment in regards to student loan debt being impossible to discharge in bankruptcy.

Where we stand with Student Loan Debt & Bankruptcy

Currently within the U.S., whether it be private or federal student loans, student loan debt cannot be discharged in bankruptcy unless the borrower can prove “undue hardship” in the court of law.

Proving undue hardship for student loans is notoriously challenging, and the current standard in which to prove “undue hardship” is to pass the “Brunner test.” This test requires the student loan borrowers to exhibit that they cannot meet a minimal standard of living (e.g., homelessness) if forced to continue to repay their student loans.

A “certainty of hopelessness” must also be proven, in which case the circumstances that constitute “undue hardship” will persist if the consumer is forced to pay off the outstanding student loan debts. Further, the borrower must prove that a good-faith effort has been put forth to repay his or her student loans and all other options have been exhausted to repay their loans. Continue Reading…

Motley Fool: Getting out of Debt as the first step to achieving Findependence

Posted By Jonathan Chevreau | June 10, 2019

Those who are regulars to this site will know that Getting out of Debt is the first step towards achieving Findependence, or Financial Independence.

My latest Motley Fool Canada blog has just been published on this topic, which you can read in full by clicking on the highlighted headline: Getting out of Debt to achieve Financial Independence.

As one of the characters in my financial novel, Findependence Day, says to the protagonists: “You can’t climb the tower of Wealth while you’re still mired in the basement of debt.”

As the article reprises, most of us start our financial life cycle with zero or even negative net worth, depending on how much student debt, credit-card debt or later mortgage debt one has accumulated. So if a young person has graduated from college or university and is able to get out of the hole early in their working life, that should be regarded as a huge initial step towards achieving Financial Independence, or Findependence (my contraction).

Keep up the frugal behaviour that got you out of debt

So how do you get out of debt as quickly as possible? The book coins another phrase, guerrilla frugality, which simply means super frugality, whether brown bagging your lunches, taking public transit or any number of other money-saving activities that ensure that you are living within and well below your means. Continue Reading…

Why I haven’t paid off my mortgage … yet

Posted By Robb Engen | June 7, 2019

Followers of this blog know that I tend to focus on saving and investing rather than trying to pay off my mortgage faster. Indeed, our household assets are projected to exceed $1 million this year but we’ve still got a $200,000 mortgage to contend with.

So why don’t I make it a priority to pay off my mortgage? It’s not strictly about dollars and cents. Here are three reasons:

1.) Higher Priorities

Setting priorities is part of any good financial plan, and those priorities change as you move through different stages of life.

For many years we put all our effort into paying off student loan and consumer debt. Then we became laser-focused on saving for a large house down-payment. Priorities shifted again towards maxing out my unused RRSP contribution room. And now, finally, we’re catching up on years of unused TFSA contribution room.

My wife and I are on the same page with our financial priorities. Right now, we’re focused on these four areas:

TFSA – contribute $1,000/month
RRSP – max out our available contribution room
RESP – max out contributions for our two kids
Travel – Visit Scotland/Ireland this summer. Vancouver in October. Maui in February.

Paying off the mortgage slides in at priority number five, which leads to the second reason.

2.) Finite Resources

In a perfect world we would all max out our RRSPs, TFSAs, RESPs, and start investing in a taxable account: all while doubling up on our mortgage payments and still having money left over for dining, travel, and sending the kids to hockey school.

Reality check. We don’t have infinite resources, so we need to make choices and trade-offs.

I mentioned above that we neglected our TFSAs for many years. That’s because we decided to get a new car and pay it off over four years. Our TFSA contributions turned into monthly car payments.

Now that the car is paid off, we can go back to funding our TFSAs and hopefully catch up on all that unused room before we need a new car again.

Speaking of cars, ours are now 12 and six years old. This “sacrifice” – if you can call not getting a new car every 4-5 years a sacrifice – allows us to increase our savings rate and fund more of our financial priorities each year.

Unfortunately, there isn’t another $800/month money leak in our budget to close that will allow us to fund a fifth financial priority (extra mortgage payments). Not yet, anyway.

And remember, it’s not simply about earning more money. I’m already combatting stagnant wage growth and creating my own raise by freelancing, selling used items online, and earning credit card rewards. That extra income allows us to do everything we’re doing now, plus keep pace with inflation and feed a growing family.

3.) Mortgage debt and asset allocation

We tend to think of mortgages and investments in isolation, but if an investor has any debt at all – including a mortgage – then he or she is effectively borrowing to invest.

You could say that I have a leveraged investment loan of $200,000. Another way to think about the mortgage is that I am short fixed income. Continue Reading…

5 pro tips staying on budget when using Credit Cards abroad

Posted By Financial Independence Hub | June 6, 2019

By Maria Weyman, creditcardGenius

Special to the Financial Independence Hub

When organizing a trip, it makes sense to plan ahead for some extra spending to make the most of the experience.

Even the most frugal penny pinchers will want some extra cash to throw around while on vacation for maximum relaxation and culture absorption.

But, if you’re using your trusty credit card to earn some rewards on those purchases along the way, there may be something you’ve overlooked – foreign transaction fees – the peskiest of all credit-card fees coming in hot to totally ruin your budget.

How foreign exchange fees work

Foreign transaction fees will show up on your credit-card statement when you make a purchase with your Canadian credit card in a currency that isn’t Canadian dollars, either when travelling abroad or shopping online. You’re charged this fee in order to convert your funds to the required currency.

There are often 2 parts to this fee:

what gets charged by the credit card issuer (Visa, Mastercard, American Express), and
what gets charged by the issuing bank (BMO, TD, etc.)

So, not only are you losing out on the currency exchange (depending on the currency), but you’re also charged an additional fee on top of that.

The average cost of foreign exchange fees

In Canada, most foreign exchange fees are 2.5% of your total purchase, but can range from 2% all the way up to 3.5% : yikes.

Let’s crunch some numbers with some examples.

Say you’re road tripping to the U.S. and use your Canadian credit card to buy a $5 USD latte from Starbucks.

At the time of writing, 1 USD is equal to 1.34 CAD.

( $5 * 1.34 ) * 2.5%

$6.70 * 2.5% = $0.17

Ok, not unreasonable. But, the more you spend, the more it adds up…

Say you travel to Ireland and use your credit card to pay for hotel stays, dining, shopping, and sight-seeing for a week, totalling $5,000 in purchases.

At the time of writing, 1 Euro is equal to 1.51 CAD.

( $5,000 * 1.51 ) * 2.5%

$7,550 * 2.5% = $188.75

$188.75 is not as easily overlooked as $0.17 more for a coffee …

And though it may not seem like much, $200 is still a significant amount of money to figuratively throw in the trash bin if you’re travelling on a budget.