Your Money Book

Last week we started a long list of some really easy half-hour steps that will absolutely set you on the path to financial success. Here are some more, just as valuable, whether you do one of them or a bunch:

-See your payroll department: Fill out the payroll form to have some money deducted right off your cheque. After all, you can’t spend what you don’t see. Paying yourself first, instead of hoping there’s something left at the end of the month, is the easiest way to save.

Have 1 or 2% of your pay taken out and put into an RRSP if you want to save for retirement, or have it put into Canada Savings bonds if you want it out once a year to pay off debts. It’s a crappy interest rate but next year you can take out the money and put it on one of your bills. You can also have your bank take the money right out of your chequing account and moved into savings. Same thing – but only if you trust yourself that you’ll keep it going.

Then move that percentage taken off your pay, or moved to your savings account, up every six months. You’re used to 1 or 2% coming off – change it to 3% and move it up every six months or once a year.

-Apply for a non credit credit card: A charge card is one that lets you charge but forces you to pay the balance in full. That is a real American Express cards. They also have the cards that entice you to make minimum payments. But if you get online and get the REAL card you’ll never ever carry a credit card balance again. I’m not the biggest Amex fan, but that’s the only card I’ll use because it takes away all temptation to pay less than the full amount you spent last month – period.

-Set up a TFSA (Tax Free Savings Account) Get to your financial institution or discount broker and open this alternative retirement account with $10. It’s the same logic as opening your savings account . $10 isn’t much but at least it’s open and ready for more.

-Get your kids or grandkids on track: Starting at age 4 (the sooner the better and more effective) whatever money they get from anywhere or anyone, one-third goes to saving, one-third to giving, and one -third for spending. No exceptions, no whining, no let’s make a deal. If they want YOUR money, it’s YOUR rules. Have them use three envelopes, or whatever you set up. That one little thing will change their financial lives forever if you stick with it. It’s not really about the money but the life lessons. When they get to be about age 10 you can change it to 10% giving and the other two parts spending and saving – your call – your choice. From three dimes, to three $10 bills, just make sure the money you give them is the exact change so they can’t delay what goes where for a while.

Last week we talked about the fact that resolutions or goals have to be measurable and achievable. OK, having said that, how about we break it down a little more? How about finding some financial steps that will take about half an hour? There are a bunch of them to talk about this week and next.

None of these in and by themselves will get you to be debt free, financially non-stupid, or rich, but any of them – all of them – are the first step to getting you on the right track. Remember that the longest journey always, always, begins with the first step. Once you’ve taken that step, the rest get easier because you’ve laid the groundwork.

-You have to know where you’re at: Get a big piece of paper and write out your debts. How much you owe, who you owe it to, the minimum payment, how long is left, if it’s a straight loan, and what the interest rate is.

-Do a budget just once: Without the TV on or playing with the kids, put your net income at the top, then write down all the bills each month, from groceries to utilities, lunch at work to haircuts – I mean everything. Subtract them from your income and you’ll have at least a one-time snapshot of your financial life in writing and in front of you.

-Set up a separate savings account: Go to the credit union and open up a savings account that’s not hooked to your debit card with $10 in it. It’s not much but you now have the account. Step two, should you choose to, is to make this either your two week net pay emergency account that never gets touched, and/or make it the place you deposit some money each and every month for your annual bills such as house insurance, money for next Christmas, your vacation, or whatever.

…we’ll do part II next week!

Happy New Year! I know, it’s not actually New Years day, but every day is a better day to make resolutions than New Years Eve. They just have a much better chance of success if you make them without the societal pressure of that day of the year.

One of the easiest ways, without getting into a lot of psychological jargon, is to change your routine. Think about the dozens of steps when you want to get in your car and drive somewhere. Dozens of steps and hundreds upon hundreds of things your brain and muscles need to do in order to make it happen. Open the door, get in, get your body adjusted, close the door, reach across for the seat belt, fasten it, check the mirror, put the right key into the ignition the right way, turn it with your foot on the break, move your hand to the gear shift, move it into reverse, etc. etc.

Now watch a teenager who has never driven a car attempt to do that. The process will take ten minutes plus. But when you don’t have a routine, you don’t automatically do things. The teenager has to actively think about each step, one step at a time.

So, if you break your routine, you’re way more likely to think before just doing, acting, or spending. Which routine do you do that comes with an automatic action of spending? If you constantly overspend and buy crap you don’t need in the grocery store, go with someone who holds you accountable, skip one isle that makes trouble for you, go to a different store, a different time of the day, with a specific list, or whatever it takes to get out of your routine.

Perhaps it’s your automatic stop at the coffee place in the morning. Maybe breaking your routine is as simple as leaving five minutes later and taking a different route. They DO have coffee at work, or you can have another cup at home. If you always go to the mall, stop going to the mall, because you know you end up bringing something home. In fact, the average person going to the mall spends $104 every time in there!

When you don’t have a routine, your brain has to think through each step of what you’re doing and it WILL change how you behave. That applies to a diet just as much as quitting a habit such as your spending routine. If you stay in the mode of always doing the same thing, reaching for your wallet is an automatic reaction that you never think about, just like the routine of getting in your car.

If you’re thinking that won’t work, that won’t make a difference, or what’s the use, I have news for you: You’re destined to spend the next year in the same financial mess you’re in right now. If nothing changes – nothing changes. If you know that you need to take better care of your money, you can’t accomplish that by doing the same thing again for another year. You know that already. The question is whether the pain of where you’re at is high enough that you’re prepared to take in some different information and try something a little different. Until then your same actions will get you the same results you’ve always had.

As Nike would say: Just do it! Or a great recent Facebook post changing around the Forrest Gump saying that life is not like a box of chocolates. It’s more like a jar of jalapenos. What you do today can burn your butt tomorrow.

Now that it’s the week after Christmas I’m reminded of an old Irish Rover Song called: Wasn’t that a party, and then talks about the hangover.

That’s kind of like our financial lives, having just spent over $22 billion on Christmas, mostly with borrowed money, and including lots of presents for ourselves. I know, I know, we work hard, it’s our money, we deserve something, it was on sale, we really needed it, etc. Well, if we were to be honest with ourselves, that’s all nonsense. Broke people can’t afford to buy stuff, and it’s almost always a “want” and not a “need.” That’s how we get to spending over $4.2 billion on impulse purchases in a year, according to one Canadian study. And, to be honest, that number is way low, because it’s the last thing we’ll admit to.

Yes, we work hard, and yes it’s our money. But do you want to keep working hard forever? Freedom 77 doesn’t have the same ring to it as that old commercial campaign of Freedom 55, does it? At some point in time, we do have to get away from the spending party and focus on paying off the hangover and saving something for someday down the road. Intellectually, we know that, but when are we actually going to get around to it is the big question that will change your entire financial life.

Right now, let’s be honest: We spend more time planning our vacation than we do our financial situation. Make 2012 the year that you’ll actually turn that around. Here are a couple of suggestions that are small enough where you’ll do it, but big enough to have a significant impact. Why small steps? Because our sub-conscious mind will revolt against huge goals that seem impossible to reach.

You’re not going to lose 60 lbs, but you can lose a pound a week. You won’t run the marathon this summer, but you can go for a 15 minute walk each day. You also won’t be debt free by February, but you can start on that journey with one step at a time.

Resolve to say no: Whether it’s to yourself when it comes to spending, to your kids, people at work, or anywhere else. It’s the one word that’ll change your financial life.

Take your credit cards out of your wallet: At least for January, leave the cards at home. If you have an emergency, you’re one call away from getting help. But going to the mall or charging this or that isn’t an emergency – honestly.

Set a cash limit: Pick an amount below which you’ll always always pay by cash or debit. The higher the limit, the better – if you make it $50, gas, small grocery purchases, lunch, etc., will all be paid cash. That alone will drastically reduce the charges on your credit card. When we use a credit card we spend 12 to 18% more – period. Whether you pay it in full or not, it’s still a ton of extra spending that isn’t helping.

Stop being financially stupid for 2012: You know exactly what that means. They are different things for all of us, but make the New Year one where you’ll stop doing the top two things that get you further in debt, or don’t grow your savings.

And finally, here’s a great post from Facebook this morning that kind of says it all: Do something today that your future self will thank you for.

Now that it’s the week after Christmas I’m reminded of an old Irish Rover Song called: Wasn’t that a party, and then talks about the hangover.

That’s kind of like our financial lives, having just spent over $22 billion on Christmas, mostly with borrowed money, and including lots of presents for ourselves. I know, I know, we work hard, it’s our money, we deserve something, it was on sale, we really needed it, etc. Well, if we were to be honest with ourselves, that’s all nonsense. Broke people can’t afford to buy stuff, and it’s almost always a “want” and not a “need.” That’s how we get to spending over $4.2 billion on impulse purchases in a year, according to one Canadian study. And, to be honest, that number is way low, because it’s the last thing we’ll admit to.

Yes, we work hard, and yes it’s our money. But do you want to keep working hard forever? Freedom 77 doesn’t have the same ring to it as that old commercial campaign of Freedom 55, does it? At some point in time, we do have to get away from the spending party and focus on paying off the hangover and saving something for someday down the road. Intellectually, we know that, but when are we actually going to get around to it is the big question that will change your entire financial life.

Right now, let’s be honest: We spend more time planning our vacation than we do our financial situation. Make 2012 the year that you’ll actually turn that around. Here are a couple of suggestions that are small enough where you’ll do it, but big enough to have a significant impact. Why small steps? Because our sub-conscious mind will revolt against huge goals that seem impossible to reach.

You’re not going to lose 60 lbs, but you can lose a pound a week. You won’t run the marathon this summer, but you can go for a 15 minute walk each day. You also won’t be debt free by February, but you can start on that journey with one step at a time.

Resolve to say no: Whether it’s to yourself when it comes to spending, to your kids, people at work, or anywhere else. It’s the one word that’ll change your financial life.

Take your credit cards out of your wallet: At least for January, leave the cards at home. If you have an emergency, you’re one call away from getting help. But going to the mall or charging this or that isn’t an emergency – honestly.

Set a cash limit: Pick an amount below which you’ll always always pay by cash or debit. The higher the limit, the better – if you make it $50, gas, small grocery purchases, lunch, etc., will all be paid cash. That alone will drastically reduce the charges on your credit card. When we use a credit card we spend 12 to 18% more – period. Whether you pay it in full or not, it’s still a ton of extra spending that isn’t helping.

Stop being financially stupid for 2012: You know exactly what that means. They are different things for all of us, but make the New Year one where you’ll stop doing the top two things that get you further in debt, or don’t grow your savings.

And finally, here’s a great post from Facebook this morning that kind of says it all: Do something today that your future self will thank you for.

Four more shopping days until Christmas, so you know what that means, right? Any semblance of reasonableness, budgeting, and comparison shopping is done and over with. Now, it’s mostly panic. And retailers know that. Christmas week is not the week for any great deals.

The average person spends $104 when they go to a mall. That has to be way higher when we have a long list of presents still to buy and not a lot of time. I don’t know if it’s too late to get you to your bank machine and draw out the cash for the rest of your shopping. I hope you’ll do it, because we spend about 18% more when we pay by credit card and, this is purely my guess, another 25 to 50% more in panic mode. If you have the cash on the counter, you’ll literally feel the pain of parting with that money and you WILL reduce what you spend.

Of course, part two is the old stand-by of gift cards. For two years, their sales have been pretty stagnant, but this year, sales are way up and will be over $30 billion in North America.

I’m sitting here looking at a $20 bill. I don’t see an expiry date and it doesn’t say anywhere on the bill that I have to use it at a certain store. It’s nice to know that this $20 is good anywhere, and anytime. That’s not the case for gift cards.

I am not a fan of gift cards unless they are at a discount, such as $80 for a $100 gift card or buy one for $25 get another for $5 free. Give the cash with a note of what you’d hoped they’d use it for and not the gift card. Remember that over 8% of gift cards are never used, so that’s $240 million down the drain, and gift cards are no good if the retailer goes out of business.

I’m fine with those from Wal Mart or Tim Horton, Starbucks or Amazon, but the smaller the retailer, the bigger the risk they won’t be around to honour the gift card. They have your cash and you have nothing.

Conversely, if you do get a gift card, use it right away for the full amount. If there’s a balance left, keep it on the fridge and use a felt marker to note what’s left so it doesn’t go to waste, or give it to someone else in line at the check out, if it’s a small amount left.

US home prices aren’t done falling. According to the National Association of Realtors, the median price in the third quarter dropped in 111 out of 150 markets. That’s pretty accurate, comprehensive and scary. The average price was down another 4.7% in the quarter.

Foreclosures, on the other hand, are a totally misleading statistic. October’s foreclosures are up 7% from the previous month, but down 31% from last year. Down 31%? You’d think that’d be good news.

Well, not really. If you remember, at the beginning of this year it came out that lenders were foreclosing on families without any proof that they actually owned the property. So they were doing foreclosures where they didn’t have the mortgage and couldn’t prove the debt. And that’s resulted in millions of stalled foreclosures. In about half the US states the lender needs to go to court to prove they’re the owner of the home. If they can’t do that – they can’t foreclose until they get their paperwork in order – or located in the first place!

So foreclosures have gone down to a trickle for most of this year. The mortgage loans are still in arrears, but it’s just given people a lot more time in their home. When they pick up again, foreclosures will set all kinds of new records just to catch up. There are still millions out there, and millions of homeowners over 90 days past due.

Right now, 10.7 million homeowners, which is 22% of all homes with loans on them, owe more than they’re worth. That’s staggering enough, but the average they owe, over and above their value is $52,000, according to CoreLogic, as of November 2011.

Add to that another 2.4 million who have less than $5,000 of equity and it’s over 27% of all homeowners.

In Nevada, one of the hardest hit states, at one point over 70% of homes were underwater, and it’s still at 58%. Some states are better off than others, but nationally, there is over $700 more owing on homes than their values.

It’s pretty sad and there really isn’t an end in sight for years and years. THAT is one of the biggest drags on the economy. And the lesson for us: Don’t finance more on your home than you can afford, avoid another line of credit which gambles your house away, and focus more on getting your debt down than up. Because 100% of all homes in trouble are ones with a mortgage. Nobody has ever lost their home once it’s paid off.

Bank of America blinked: Two weeks ago, one of the largest banks in the world announced they would start charging a $5 fee for debit cards. We talked about it, because I believe what happens in the US comes to Canada.

But Bank of America actually blinked. When the heat and negative feedback got so bad, Cit, Wells Fargo and a number of other banks who were also testing a debit card fee stopped it. Yesterday, Bank of America decided to withdraw that idea as well.

Ah, the power of the consumer. We don’t get mad very often, but when we do, it has powerful consequences. It’s too bad we don’t get mad more, instead of just tolerating higher and higher fees for less and less service. Apparently the impetus for their reversal is the Wall Street protest movement that’s now spread to so many cities, including some here in Canada. Their spotlight is partly on large corporations, and in this case, we all benefit.

When will you have an ah ha! or ENOUGH! moment with your personal finances in one way or another? At what point is the pain level of everybody getting rich from your pay cheque be high enough where you’ll do whatever it takes to turn it around and get out of your personal financial nightmare? What’ll it take? Because I hope it comes soon – it’ll be so worth it!

Quick question: Would an extra $4 a month really rock your world in a big way? There’s a new radio campaign out from one of the no-service banks: Switch your credit line to us and save half a percent in interest. Plus, the guy in the commercial says he now sleeps much better and worries less.

OK, that’s stupid. If you don’t owe anything on your credit line, the rate doesn’t matter at all. If you owe $10,000, a half percent interest saving amounts to $4 a month. That’s going to help you sleep better and worry less? Even with a $20,000 balance, it’s a lousy eight bucks a month saving! Hello?

The ad may sound great, but shouldn’t get anyone excited. We get ourselves into a big financial mess with two things: Focusing only on the rate or purely the monthly payment.

When it comes to borrowing, there are four things you’ll need to know:

The balance or total amount you’re borrowing
The interest rate
The term of the loan – how long you’ll owe the money
The payment per month

The payment is the least important factor. Sure, it has to fit your budget, but you can pretty much have any payment you want – you just have to stretch the term to a really long and stupid time period. A car can get financed for three years, or up to seven years – your call, your interest, your pain – if you’re not careful and don’t ask!

The rate only matters if you owe a lot of money AND you owe it for a long period of time. You’re better off owing $5,000 at 20% for a year than owing $5,000 at 6% for a decade! The faster you pay it off, the less the interest matters since the debt isn’t going to be around for long!

That leaves the balance, or the total amount you owe or borrow. THAT is the most important factor. News flash: If you don’t borrow anything – the rate doesn’t matter and your payment will be ZERO! Want to guess how many foreclosures, collections, repossession or legal actions happen to people who don’t borrow money? NONE – that’s right!

If you can lower what you owe, borrow less, get a little less expensive renovation or car, take some of your savings as a down payment, or any one of a dozen other ways, THAT controls everything.

Focus on what you are paying and not what you’re saving. Focus on the balance and not the rate! Four bucks a month is not the issue, it’s the payment of $300 or so, the balance you owe, and the fact that your line of credit likely has your entire house for collateral!

Today, I’ve got three stories that make me ask more questions than I have answers:

Electronically Traded Funds, called ETFs, are modern day mutual funds that you can purchase for a tiny commission and fee. Right now, there is more money invested in Gold ETFs than there is in the entire S&P 500. And that consists of the 500 largest companies. Just think about that. The fever is at an all-time high when there is more invested in something shiny and speculative than there is in the assets of the largest companies in the world. Although invested isn’t the word I’d use. I’d call it gambling. True or false? It may go up for another long stretch, but mark my words, when it corrects, it’ll drop by half in a hurry.

The State of California just approved an insurance company test which charges your insurance premiums based on the miles you drive. What do you think? Is that something that’ll benefit people or hurt them? I guess if you’re a Senior, it could be a good deal, but if you drive a fair bit….not so much….

Bank of America has just announced they’ll now charge $5 a month for their clients to use a debit card.

With the recently implemented financial reforms, banks have had their massive debit card fees capped. The Federal Reserve, and this would be the same in Canada, says it costs the banks 4 cents to process a debit card transactions. But until recently, their fees were averaging 44 cents. That’s a 1,000% return – a pretty good profit! It’s now 25 cents, and that helps merchants, and eventually you and me in lower prices, but cost the banks a ton of money.

Would you pay a fee just to have and use your debit card? I bet 99% of people will when it does come to Canada. Besides, if you go back to a credit card, the banks make even more money. So heads you lose, tails they win. Sick – but true.