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.”

Debt avalanche vs. debt snowball: When math trumps behaviour

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John and Erica Mullen are in their mid-thirties and have two young children at home. Together they earn well over $100,000 per year, but a combination of poor choices and unlucky circumstances have left them buried in debt.

Their substantial income affords them the luxury of not having to turn their life upside down by selling their home and vehicles; however, they will need to make some tough sacrifices in order to dig themselves out of this hole.

Creditor Balance Rate Payment Interest-only
Store credit card $6,800.00 26.00% $200.00 $147.34
Consolidation loan $23,000.00 8.00% $430.00 $153.34
Line of credit #1 $20,000.00 6.34% $105.67 $105.67
Tax bill $1,700.00 5.00% $200.00 $7.09
Car loan #1 $36,000.00 3.90% $460.00 $117.00
Line of credit #2 $16,000.00 3.00% $40.00 $40.00
Car loan #2 $23,000.00 0.90% $317.00 $17.25
$126,500.00 $1,752.67

After a close look at their budget, the Mullens decide they can afford to put $2,000 per month toward their non-mortgage debt. They want to know how best to allocate the extra cash so they can be debt-free faster and pay the least amount of interest.

Two popular debt repayment strategies are the debt snowball and the debt avalanche. Let’s look at each method and apply it to the Mullen’s situation:

Debt Snowball

Dave Ramsey, American author of The Total Money Makeover, suggests an unusual strategy for getting out of debt by using something called the debt snowball method.

With the debt snowball, you’re throwing math out the window, focusing instead on the psychological advantage that comes from making progress with quick, successive wins.

Related: Should you pay off your partner’s debt?

Start by arranging your debts from lowest balance to highest. It feels better to rid yourself of your smallest debt, and the idea is that the snowball effect builds enough momentum so that you’ll be more inclined to stick with the strategy on your way toward debt freedom.

This chart shows how the Mullens would use a debt snowball approach to tackle their debt. Remember, they’re throwing an extra $2,000 per month over-and-above their minimum payments:

Creditors in Original Total Interest Months to Month Paid
Chosen Order Balance Paid Pay Off Off
Tax bill $1,700.00 $7.08 1 May-15
Store credit card $6,800.00 $405.61 4 Aug-15
Line of credit #2 $16,000.00 $301.35 11 Mar-16
Line of credit #1 $20,000.00 $1,572.90 19 Nov-16
Consolidation loan $23,000.00 $2,929.50 25 May-17
Car loan #2 $23,000.00 $390.39 30 Oct-17
Car loan #1 $36,000.00 $3,270.27 37 May-18
 Total Interest Paid: $8,877.10

You can see how the strategy works: the tax loan is killed off in the first month and from there the Mullens can focus on the department store credit card, which will be paid off three months later. Altogether it’ll take 37 months to pay off all their non-mortgage debt and the total interest paid over that time is $8,877.10.

Debt Avalanche

Continue Reading…

5 common Mortgage mistakes made by first-time Homebuyers

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By Sean Cooper

Special to the Financial Independence Hub

Buying a home is an exciting time for first-time homebuyers. It’s also a busy time. Besides hiring a real estate agent, house hunting and finding time to get all your daily errands done, you’ll also need to find time to shop for a mortgage.

While it can be easy to treat your mortgage like an afterthought, by doing that you’re doing yourself a big disservice. Buying a home is most likely the single biggest financial transaction of your lifetime, so it’s important to give it the attention it deserves: that includes your mortgage.

Many first-time homebuyers shop for a mortgage based solely on the lowest mortgage rate, when there are so many other (more important) factors to consider. That’s just one of the common mistakes first-time homebuyers make. Let’s look at this and four more common mortgage mistakes to avoid.

Mistake #1: Skipping the Mortgage Preapproval

It’s hard to go house hunting if you don’t know how much you can afford to spend on a property. A mortgage preapproval helps you come up with a budget for the property you’d eventually like to buy. By providing your mortgage broker with some basic personal and financial information, such as your income, employment history and how much you’ve saved up towards a down payment, they’ll be able to take that information to the lender and get a mortgage preapproval. A mortgage preapproval tells you the maximum amount you can spend on a home. It also usually comes with a rate hold. You’re typically guaranteed a mortgage rate for between 90 and 120 days. If rates go up during this time, you’re guaranteed the lower rate. If rates go down, you get the lower rate. It’s a win-win situation for homebuyers.

Mistake #2: Shopping based solely on the Mortgage with the lowest rate

Many first-time homebuyers are fixated on getting the lowest mortgage rate:  too fixated. They use mortgage rate comparison websites to find the mortgage rate with the lowest rate, yet forget to consider other, more important factors. As I write in this post, the mortgage with the lowest rate may not be the best mortgage for you: quite often it’s not. It’s important to consider what I like to call the “3 mortgage P’s” – penalties, prepayments and portability. Of course, there are other factors to consider, such as fixed versus variable and standard versus collateral charges. Mortgage brokers know mortgages like the back of their hand since that’s all they deal with. A mortgage broker can help identify the factors that matter most to you and choose the mortgage that’s the best fit.

Mistake #3: Not considering other options besides the 5-Year Fixed Rate Mortgage

As Canadians we are very risk averse. Continue Reading…

A priceless Early Retirement

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Billy and Akaisha on Naples, Florida beach

Billy and Akaisha Kaderli

Special to the Financial Independence Hub

Some say it’s impossible.

Others simply dismiss the notion outright even if they are curious. How do we live on less than $30,000 per year while traveling through Thailand, Vietnam, Mexico, Central America and other exotic locations? We don’t give up luxury, nor do we deprive ourselves.

So what is our secret?

Our approach is very simple: We have chosen not to dedicate our time and money to support a complicated infrastructure.

For almost three decades we have wandered the globe living in countless countries. We have purchased new computers and digital gadgets, refreshed our wardrobes many times over, received extensive medical care, and we have biked, hiked, scuba’d, taxi’d, bused, sailed and flown endless miles.

How is this possible?

Downsize the house, car, and Uncle Sam

Our housing expenses include our annual lifestyle fees, maintenance, repairs, and utilities for our home in the States, as well as hotel rooms or apartments we may rent while on the road. To ameliorate this cost, sometimes we house sit. We have been car free for years now, but our transportation costs include airline tickets, visas, passport renewals, taxis, Uber, boats, trains, and tuk-tuks.

If you look at your own expenses, you will see that housing and transportation take a good chunk of your income. Becoming mindful of what goes in to support these two areas of your life will be eye-opening. Take a close and honest evaluation of this state of affairs for yourself. Understand precisely where your money goes and why.

Another area that takes fiscal attention is taxes. Income taxes are something you can control by restructuring your portfolio. Interest from corporate bonds and short-term capital gains are taxed at income rates that are higher than qualified dividends and long-term capital gains [in the U.S.]. This restructuring is something to think about and can save you a significant amount of money yearly.

In most cases, housing, transportation, taxes and food/entertainment are the top areas of cash outlay in a person’s economic life. Modifying any or all of them — which is exactly what we did — will have a significant impact on your annual expenses.

Lunching in Guanajuato, Mexico

High living, low costs

All that being said, we have a great deal of fun living on less than $30,000 per year. Spending wisely, we get the most bang for our buck. For instance, living in a resort location in the States, we have access to a swimming pool, tennis courts, and a workout room without having to lay out cash for their purchase or maintenance. We eat high-quality meats, fish, fruits, and vegetables because we shop at farmer’s markets and watch for the rotating grocery sales to purchase when prices are attractive.

When we visit foreign countries, we live like the locals, eating fresh foods from the open markets, and we rent apartments, house sit or rent hotel rooms by the month. In this way we have maid service, gardeners, Wifi, and no utility expenses.

Walking instead of driving whenever possible, we also choose low-cost entertainment options such as tennis, hiking, biking, swimming, going to museums and art shows, and enjoying local festivals and celebrations. Volunteering for projects wherever we live, this provides us with new learning experiences and a sense of fulfillment. We share time with friends either cooking for them ourselves or going out to lunch instead of opting for higher-priced dinners. And when it’s time to hit the road, we take full advantage of current airline deals and travel packages.

Reaping the benefits of simplicity we place more emphasis on creating a life of meaning rather than a life of “‘stuff.”

Sunset at Naples Beach

What about you?

So you think you can’t make it on $30,000 yearly? How about $60,000 or $100,000 or more? All this means is that your net worth will need to be high enough to maintain these levels of spending.

No matter where you are in this continuum, you can profit from doing any of the following:

Simplify your personal infrastructure

Know where your money is going, and decide whether it’s worth it to you. Do you want to keep up the pace of your current spending? Make your funding priorities reflect your values.

Plan your retirement tax strategy now

Know there is a balance in the exchange of time and money

Do you want more money, or do you want more time? Your choice here will affect your future. Be clear about what you want.

Remember, the best things in life are free

Friendships and connection to society are based more on your attention and time, rather than on your money. Watching the sun set with a loved one — sharing life experiences together — creates memories that will far outlast anything you can purchase.

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com,they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstoreor on Amazon.com.

 

52% of Canadians support new Mortgage Rules

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

It has now been four full months since Guideline B-20 – a slew of new mortgage qualification requirements – hit Canada’s borrowers in the wallet.

Under the new regulations, those applying for a new mortgage, and who are paying at least 20 per cent down on their home purchase, must qualify at either the Bank of Canada’s benchmark rate (currently 5.14 per cent), or their mortgage contract rate plus 2 per cent, whichever is higher. While the mortgage payments will be made at the borrower’s actual rate, this is the government’s way of shock-proofing lending, ensuring borrowers can still make their payments should rates rise exponentially.

Experts have stated that Guideline B-20 would slash the average home buying budget by 20 per cent, and knock as many as 10 per cent of buyers out of the market altogether. Market conditions have proven softer in the months following the new rule, with national prices falling 10.4 per cent in March, and an exodus from more expensive home types to the lower end of the market, such as condos for sale in Toronto.

But have they truly dissuaded Canadian home buyers from entering the real estate market?

To find out, Zoocasa polled just over 1,400 Canadians from all provinces, as part of the second-annual Housing Trends Survey. Respondents were asked for their sentiments and experiences as a result of B-20, and the overall rising interest rate environment.

Majority not impacted by Stress Test

According to the data, the majority of recent home buyers have withstood the introduction of Guideline B-20 unscathed; of those who purchased a home between October 2017 (when the new rules were first announced) and March 2018, 48 per cent say there was no change whatsoever to their buying timeline.

However, 27 per cent reported they rushed their purchase as a result, while 6 per cent delayed buying. An additional 19 per cent who bought homes weren’t actually aware of the new mortgage rules at all.

Also, the impact has been more significant on those who have no yet purchased their home: while 40 per cent stated B-20 hasn’t changed their mind about buying, 15 per cent will delay their home purchase, and a full 15 per cent now feel homeownership is out of reach altogether. Continue Reading…

Are you financially ready to buy your first home?

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By Allan Tran

Special to the Financial Independence Hub

Buying a home is usually the biggest investment you’ll make. Can you afford it?

Recent surveys show that potential buyers are concerned about interest rate increases and new federal lending guidelines. Many people are delaying their home purchases. It can be hard to know when to take the plunge or hit pause. Try these exercises:

Simulate the total expense

When talking to mortgage brokers and real estate agents, you can get preoccupied with rates, what you can get approved for, and listing prices. Those matter, but figure out the bottom line. Can you swing the total costs and still live your life?

Calculate your expected fixed home ownership costs: mortgage payment, property tax, home insurance, utilities, etc. Take that total and compare it to what you’re paying now for rent. The difference is what you’ll need to be able to cover.

Now, set that amount aside every month for a year. That’s long enough to experience all the ups and downs of your annual expenses. See whether you can handlethe monthly savings for the home you want for a sustained period

Take a hard look at your spending

Saving for a home, then managing the ongoing expense, can require a shift in spending habits. You can’t do that without a handle on where you actually spend your money.

Review the last three months of your credit-card statements and other bills. Look at wants versus needs. Think about what costs you could have avoided and how those add up. For instance, many costs that we tap a card for are variable. You can likely avoid some. Try and park that money into savings.

Another strategy is to force savings by tying it into spending. Say you spend $20 a week on coffee. Yes, you can save $1,000 a year by foregoing that. But you want coffee. Well, you also want a home. How about putting the equivalent towards it? It’s just a way of disciplining yourself to save for a bigger dream.

Force accountability

If you’re buying a home with a partner or spouse, get a joint account where you can’t pull out money without both signing off. This will help you think twice about spending and hold each other accountable.

Many couples have different spending and savings habits. The point is to train you to have honest conversations about finances. If you’re going to own a home together, you need to be on the same financial page before, during and after the purchase.

Stress test yourself

The Office of the Superintendent of Financial Institutions has new rules around mortgage underwriting. Potential home buyers must be able to handle a minimum qualifying rate: the greater of the five-year Bank of Canada benchmark rate, or the contracted mortgage rate plus two percentage points. Continue Reading…