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.”

How to Retire debt-free

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By Laurie Campbell

Special to the Financial Independence Hub

These days, don’t be surprised to find a senior citizen standing behind the counter of your favourite fast food spot taking your order instead of a braces-wearing teen. What retirement looks like today has changed quite significantly from what it was even just ten years ago, and there’s no stopping this trend. More and more seniors are staying in the workforce, and for many of them, they have no choice.

Last June for Seniors Month, our agency, Credit Canada co-sponsored a seniors and money study that looked at the financial difficulties Canadian seniors are facing; the results, while shocking, were no surprise.

As a non-profit credit counselling agency, our counsellors are on the forefront of what’s happening when it comes to people and their financial hardships, and we are seeing a large number of people who should be starting to settle into their “golden years” still working, maybe even taking on an additional side job, just to pay off their debt, let alone get a time-share in Florida.

When we conducted our study in June 2018, it revealed that one-in-five Canadians are still working past age 60, including six per cent of those 80 and older. And while one third do so simply because they want to — which is fantastic, kudos to you — 60 per cent are still working because of some form of financial hardship, whether it’s too much debt, not enough savings, or other financial responsibilities, like supporting adult children.

The truth is the golden years have been tarnished, and I don’t know if we’ll ever get them back.

Half of 60-plus carrying some form of debt

Many of today’s retirees are living on fixed incomes, making them vulnerable to unpaid debt. In fact, our study revealed more than half of Canadians age 60 and older are carrying at least one form of debt, with a quarter carrying two or more types of debt. What’s even more alarming is that 35 per cent of seniors age 80 and older have debt, including credit-card debt and even car loans.

Staring at the problem isn’t going to help, nor is hiding from it. The best thing we can all do is to face the facts head-on and devise a plan of action that we know will work, whether it’s getting rid of any debt while building up savings, taking on a side job, delaying retirement by a few years, or all of the above.

Sizing up Government support

Before delving into the numbers it’s important to understand what income you can expect to have during your retirement. A few numbers have been compiled here as an example, but if you wanted to get more detailed information you can visit the Government of Canada website and click on the Canada Pension Plan (CPP) or Old Age Security (OAS) pages.

So, let’s get started by taking a look at 2017. Continue Reading…

Simple investing isn’t easy

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

In my last post I covered why simplicity often beats complexity, especially when investing.  To quote myself:  “Simplicity is … the art of designing good, simple habits you can effectively implement and readily sustain.”  This keeps you on track toward your personal financial goals, with minimum fuss and maximum cost-management.

So why doesn’t everyone invest simply?  Because it isn’t easy.  We’re often done in by a host of human habits like fear, greed, loss aversion and herd mentality.  These and many other instinct-driven biases trick us into abandoning our good, simple plans whenever the next “all you need to do …” trend comes along.

“All you need to do is buy some dividend-paying stocks and you’ll have the income you need.”

“All you need to do is buy a few ETFs and you’ll be all set.”

“All you need to do is buy a couple hours of financial advice to get you up and running.”

While dividend-paying stocks, ETFs and hourly advice might still have valid roles to play in your plans, these sorts of “how to invest” fads shouldn’t override why you’re investing to begin with.  Plain and simple, your “why” should be guided by your long-term financial goals, like how much wealth you’d like to create or preserve over what period of time.  Your “how” should be grounded in robust academic evidence and time-tested solutions.

Unfortunately, the data tells us investors are often unable to take it easy on hyperactive trading.  For example, a 2017 Vanguard white paper, “Principles for Investing Success,” found that investors would move in and out of mutual funds and ETFs alike in reaction to market mood swings.  They’d also pile into and out of funds according to recent Morningstar ratings.  Instead of patiently embracing an efficient, long-term discipline, they were buying hot, high-priced funds and selling them low, after they’d cooled off.

Vanguard concluded (emphasis ours): “Investors should employ their time and effort up front, on the plan, rather than in evaluating each new idea that hits the headlines.  This simple step can pay off tremendouslyin helping them stay on the path toward their financial goals.”

Simple?  You bet.  Easy?  The evidence suggests otherwise.  That’s why I prefer to work with families upfront and ongoing with respect to their planning and investing.  That’s the only true way I know to ease their way over the long haul.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on June 5, 2018 and is republished here with permission. 

How to pay off your mortgage in 10 years

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By Karren Smith

Special to the Financial Independence Hub

Owning a home without a mortgage is something of a dream for many, and an important step in financial independence. Paying off a mortgage in 10 years can seem like a massive task, but with some simple financial strategies and planning, it’s possible.

While you will need to make some sacrifices, the benefits of owning your home as soon as possible is worth it for many people. By paying off your loan more quickly, you and your family will save thousands of dollars in interest and have more money to put towards the things you love, such as overseas travel, or perhaps a second home for holidays. Owning your house can help your life become freer and more flexible. So how can you escape the shackles of your mortgage and pay off your home in 10 years?

Create a simple plan

Assuming you’re debt free, aside from your mortgage, you can make a simple plan that will help you pay off your home within 10 years. For example, let’s say you have a $300,000 loan at a 5% interest rate. If you have a single income of $95,000, you can pay off your loan in 6-7 years with $2,000 fortnightly payments.

If you’re a couple, with an income of $140,000, you can pay your mortgage off in 5-6 years with $2,600 fortnightly payments.

Of course, these numbers are just a starting point to illustrate what’s possible if you focus on paying your home off. Bigger loans will require more time or bigger repayments. Obviously, the higher your fortnightly payments are, the more quickly you’ll pay off your loan; however, at the same time, it’s important that you have enough money to cover your expenses and live comfortably. Continue Reading…

5 things to consider when buying a new car

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By Sia Hasan

Special to the Financial Independence Hub

It’s easy to buy a car without giving the purchase much thought. Every car dealer in town is ready to roll you off the lot in a brand new car today. If your credit score presents a problem, they’ve got a cheaper used model for you. Should your credit preclude that, there are any number of “buy here pay here” stores ready to roll you off the lot no matter what’s on your credit report.

But are you making a wise investment? People with lots of money got it by asking themselves that question before every purchase, be it a car, a house, or a hamburger. When it comes to a car, the answer to that question takes some research into the vehicle and a hard, truthful look at your financial situation.

If you are like most people, the first part of the answer is much easier to obtain. Ratings and reviews can tell you about the reliability, safety, and warranty. Armed with that information, it’s fairly easy to pick a car that’s not likely to cost you your left kidney. The second half of the equation requires putting the wishful thinking on the shelf and giving yourself an honest answer as to what you can afford.

Here are five important considerations when investing in a vehicle:

1.) Run the numbers

Before you even step onto a car lot or start reading the auto ads, know your budget. To figure this, add up the cost of all of your basic needs, like housing, utilities, food, cellphone, etc. Be sure to include the less basic but important needs, like saving for retirement, taking a vacation, saving for emergencies, going on a date, etc. Be honest with yourself. When you add in the cost of your new car, remember it’s not just the payment. How much it will cost for gas, insurance, maintenance, and repairs must also be included. Once you know what you can afford on a monthly basis, any number of online calculators can show what purchase price is in your range.

2.) Buy or lease

Most consumers are better off buying because they can gain equity in the car and eventually pay it off. With leases, the payments never end. The lease term expires and then you need another car. Also, mileage caps are restrictive and terms can be confusing. If you drive very little and don’t need the car for the long-term, leasing may make sense. Also, if you plan to drive a new car every two years, leasing may work better because, unless you’re a cash buyer, you’ll always have payments anyway.

3.) New or used

New cars drop a third of their value as soon as the proud new owner drives off the lot. Some of the best car deals out there are for 1- to 3-year-old cars. They’ve taken the initial depreciation but are still in good shape. Continue Reading…

Poll finds most wonder how friends or neighbours can afford lifestyles

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It’s one thing keeping up with the Joneses but a poll from Edward Jones finds that 61% of Canadians wonder how their friends or neighbours can even afford their lifestyles. This is especially so among Millennials (aged 18 to 34), 71% of whom felt this way, while 66% of Gen Xers aged 35 to 44 were curious to understand how those around them finance their purchases.

Seems to me this gives new meaning to the phrase The Millionaire Next Door, a popular book on how frugality is a key trait in building wealth. Typically, the kind of millionaires in the book live modestly and their net worth may not be obvious merely observing the size of a given home and/or what’s parked in the driveway. Conversely, it can also be that an apparent “millionaire next door” has no net worth at all but is fuelling their conspicuous consumption merely with debt.

Either way, it appears many of us are influenced by what our associates are spending their money on.

Sadly, the Edward Jones poll found that the pernicious practice of looking at the purchases of others may influence consumers to buy beyond their own budgets: a whopping 93% said they experienced buyer’s remorse after such purchases and admit to regrettable spending habits. Among Millennials, 96% experienced buyer’s remorse but so did 90% of baby boomers.

Among the types of purchases most likely to generate regret were tangible purchases, which were cited as a source of regret in 83% of cases. Clothing or shoes were regretted by 35% polled, jewelry by 28% and electronics by 26%. Millennials regretted spending on clothing/shoes in 47% of cases, while boomers were more likely to regret spending on jewelry (34% of them did).

While Millennials famously are supposed to value experiences over stuff, across the Canadian population, 83% regretted making impulse tangible purchases, versus 71% for experiential purchases.

Build spontaneous spending into your budget

So what lessons does this survey furnish for those seeking ultimate financial independence? “If you know you enjoy spending money spontaneously, build this into your monthly budget,” said Roger Ramchatesingh, Director, Solutions Consulting at Edward Jones in a press release issued on Monday, “When it is unplanned for, it can add up over time and hurt other long-term goals such as retirement or the purchase of a home.” Continue Reading…