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Avoid the Credit Card minimum payment trap

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Somewhere on your credit card statement there is a note saying if you only make the minimum monthly payment each month, it will take you a certain number of years and months to pay off the balance – BUT ONLY IF YOU NEVER ADD ANY MORE CHARGES TO THAT CARD AGAIN!

Your credit card agreement will specify the minimum payment that is due every month. This amount is generally a certain percentage of the balance owed. This percentage can often be based on factors such as your credit score and the limit on your card.

Basing it on a percentage instead of a fixed amount (like a consumer loan, for example) works in the credit-card company’s favour because the minimum monthly payment reduces as your balance reduces. It will take decades to get out of debt and cost you hundreds, if not thousands, of dollars in interest.

At one time, minimum payments were 5% of your balance, but they have gradually reduced to an average of 2%. My personal Capital One MasterCard requires only 1.45%.

According to a recent TransUnion survey of Canadian credit-card holders, 44% of respondents pay their credit card balance in full each month, and 9% just pay the minimum. Interestingly, it varies by province, with consumers from Ontario (27%) and British Columbia (20%) most likely to pay the minimum.

Avoid this financial trap

Jacob moved into his first apartment. His first stop was the local furniture store to buy some living room furniture. He put $5,000 on his new credit card (18.9% interest). The first minimum payment was $200 (4%). If he maintains this payment, it will take him 11 years and 5 months to pay the entire balance and, by the time he has made his final payment he will have paid $8,109 for his furniture. That’s a lot of money for something that will drop in value year by year, assuming he will still own it in 11 years. Continue Reading…

The “nice” problem of million-dollar RRSPs

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Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?

My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.

As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like  interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.

(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)

The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.

Draw down RRSPs/RRIFs early, delay CPP/OAS to 70

As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Continue Reading…

How to boost your home’s resale value

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By Sia Hasan

Special to the Financial Independence Hub

While your house is your home, it is also a substantial investment that can increase tremendously in value over the years. Property value may increase through changes in market conditions in your hometown; it can also increase when you make strategic upgrades and improvements to the property and even through proper home maintenance steps over the years. Some improvement projects can pay off substantially, and these are the areas you may want to focus on initially for the best results.

Focus on Curb Appeal

If your goal of increasing property value is based on a desire to sell the property soon, curb appeal is a prime area on which to focus. Curb appeal is immediately visible to buyers who are browsing through online listings, and great curb appeal can entice them to continue to flip through your property’s online photos and request a tour. Curb appeal may be improved by fertilizing the lawn, mulching the flower beds, trimming the trees, adding new flowers to your space and more. If you have extra time and money, repainting or replacing your front door and decorating the patio are wonderful ideas to consider as well.

Upgrade the Kitchen

When a kitchen renovation project improves the style and function of the space, it can result in a considerable increase in property value. In fact, you may be able to recoup as much as 80 per cent or more of your costs to upgrade the kitchen through an increase in property value. Choose upgrades and a design that appeal to the masses for the best results, such as a neutral hue for counter tops rather than a bold colour. In addition, only make upgrades that are in line with your market. For example, avoid investing in high-end luxury appliances for a kitchen in a starter home. Continue Reading…

Six tips to make Travelling easier

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Billy & Akaisha Kaderli

By Billy and Akaisha Kaderli

Special to the Financial Independence Hub

Travelling is challenging enough with all one has to think about: getting the best price on airline tickets, arranging for lodging reservations, and being sure your passport is up-to-date with no expiration in the next six months. Who will watch your home, pets and garden while you are away?

Then there’s packing.

Are you one of those people who packs everything just in case you might need it? Or you pack something because you like it, even if it’s not seasonally appropriate and goes with nothing else in your bag?

The following tips can help you bring order to packing chaos.

1.) Days before you leave, make a list of what you essentially need for your trip and add to that list as you think of items. Then when you pack, you can confidently check off your list instead of relying on memory and being anxious about forgetting something.

2.) When you travel, wear heavy clothes like your jacket on the plane, including your heaviest shoes. Pack lighter footwear in your luggage. Shoes are the heaviest items, so pack fewer of them and make do. Continue Reading…

Which investments are best inside and outside RRSPs

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As we stated in an earlier article on RRSPs (What you need to know to build a productive RRSP) your investments gain doubly in your RRSP. Instead of paying up to 50% of your profit to the government in taxes, you keep 100% of your money working for you.

When you lose, however, you take a double loss. You lose the money you’ve invested as well as the opportunity to have the money grow for years, or even decades, sheltered from taxes.

So don’t use it as a place to find out if you have a talent for stock trading.

Successful investors put only their safest investments in RRSPs. These investments have the greatest potential to increase in value over time and therefore benefit from the RRSP’s continuing protection from taxes.

If these investors indulge in penny stocks, stock options or short-term trading, they do so outside their RRSPs.

If you hold speculative investments like this in an RRSP and they drop, you lose more than the money you invested in them. You also lose the tax-deduction value of a loss outside your RRSP. Outside your RRSP, you can use capital losses to offset taxable capital gains in the current year, the three previous years, or any future year.

If you invest in mutual funds, you have another set of tax concerns. At the end of the year, mutual funds distribute any capital gains they have made during the year, after deducting any capital losses, to their unitholders. So, you may have to pay capital gains taxes on your mutual-fund holdings, even though you haven’t sold.

Continue Reading…