Your Money Book

The better news: Sit tight – they’re coming down lots more. There’s no guarantee, because even weather forecasters can’t get it straight a week out, but with the huge drops in the U.S. and the slowdown in the economy, this one is kind of a no-brainer.

The bad news: It’s only a rate drop and all those bills you have still need to get paid. Kind of like gas prices dropping a couple of cents – real exciting, but not that big a deal in the big picture. But every bit helps…

If you’ve got debts ranging from mortgage loans to cars, lines of credits to credit cards, some will be affected, some won’t.

We’ll talk about mortgages and what to do if you’re in the middle of a fixed term in a couple of months when they come down some more. Yes, there is help and hope for you. But If you have a variable rate, or floating rate right now, your payment is coming down. If you’re mulling changing it to a fixed rate one – hang in there for the next couple of rate decreases before you lock it in.

Anyone considering borrowing when the rate goes down – your payments will be lower, and that’ll save you money – a little bit. But it’d be great if you held off a little longer for a few more rate decreases. Drive your car a little longer, get that line of credit a little later (if at all), or if you’re in the market for a home get the pre-approval in place now (it’s good for 60 to 90 days) to lock in the rate and lenders WILL give you the lower rate at the time you’re closing approaches.

If you’re looking to buy a new vehicle make sure to get the price from the dealer using either the rebate OR the cool rate they may offer. That cool rate just got less attractive so take the net price after the cash rebate and get a quote from a credit union. Very often the rebate and prime rate financing is better than the 1.9 or 2.9 the dealer has! But you’ll never know if you don’t do the comparison shopping!

Your credit cards won’t change at all – sorry. They’re around 19% average, they’re a rip off, and they ain’t moving – there’s way too much profit in the high rates they charge and you’re paying it so there’s no way they’re coming down. But until you really really believe they’re a rip-off, you’re not likely to get angry enough to change to a debit card and stop using credit cards altogether.

Lines of credit, however are all based on the prime interest rate. If it’s secured by your home, the payments are interest only, or if it’s an unsecured line it’s generally three percent payments. Those will drop. But why do you have the line of credit in the first place? If it was for an emergency, you’ll have a zero balance and it won’t matter.

If you do have a balance, don’t lower your payments with this interest drop. Keep paying what you’ve been paying. This is a huge opportunity to be able to pay the same amount of money but more of it will go to principal and you’ll have it paid off faster.

That applies to all of your borrowing. Is it to tread water and pay as little as possible or is it to use this rate decrease to step up to the chance to pay it off quicker? Only you can decide but there’s nothing like financial freedom with NO debts and monthly payments.

Wow – it’s only Wednesday and what a week it’s been in the financial markets.

Monday the world markets dropped enough to wipe out $5 trillion in wealth while the US markets were closed and Tuesday morning the US Federal Reserve dropped rates three quarters of a point.

Here in Canada they came down a quarter of a point that the banks did pass on, but there had been rumours that the no service mega banks were considering not lowering the prime rate.

While it was only a rumor that started back in December, there is no way to buy this kind of bad publicity is there? And how great that a number of media outlets, starting with columnist Greg Weston, brought this to the attention of the world.

The logic was that banks wouldn’t pass on the one-quarter point rate reduction to offset some of their rising expenses and that would include the billions of dollars some of them have lost in their subprime mortgage portfolio.

When the prime rate changes, it affects two-thirds of our borrowing costs, either directly or indirectly, for consumers and businesses. A lower rate is the Bank of Canada wanting to impact the economy, manufacturing, consumer spending and the dollar.

How dare the banks consider not moving down the prime at the same time? Isn’t it enough to keep charging us more and more interest, less and less competition and more service charges everywhere? Am I just cynical or are we supposed to cover some of their paper losses?

Just having this idea floated is another big reason to allow more competition in the banking field. In the U.S. there are about 3,000 financial institutions waking up each morning figuring out ways to bankrupt each other – that’s competition. Not the five we’ve got who want to merge into two or three.

But there’s good news in hearing banks might not change the rates. Because when we get mad – we get moving and there are alternatives for your financial needs:

For savings: ING right now is at 3.75%

For loans & mortgages: Credit unions are at or below the mega no service banks’ rates, are locally owned and run AND you’re a shareholder so you’ll get a large refund at the end of the year.

For RRSPs: Mine are with Primerica Financial. Many of their mutual funds have way better returns – and there are lots of other no-load no fee places to comparison shop.

Maybe this is another reminder to get informed because knowledge really is power and to remember to always always comparison shop. There are options and a lot of ways you can save interest and money.

The good news: It’s a new year! The chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? It’s likely that you’re already broke! How is that? Well, we spend more than 120% of our disposable income, half of us have no savings and almost 70% of us don’t make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich, and there’s simply nothing left at the end of the month.

So when it comes to making some commitments about our debt, credit and all those bills, perhaps we should think small to make sure we set ourselves up for a win, and not a sure-fire let-down. But small doesn’t mean pointless, small just means some little steps you can actually keep, that’ll pay off big for 2008.

If you need additional motivation, remember that every $100 you don’t pay out making lenders rich is really about $150 or more. Why? Because you earn gross income, then all the deductions and tax come off your pay, and it’s only the net income that you have left over to pay bills.

So here are some more points, continuing our list from last week:

6. Set yourself a credit limit. If you won’t leave your credit cards at home for at least 90 days – pick a dollar figure below which you’ll pay by debit card or cash. Maybe $20 or $30 bucks – that’s it. But anything below that, you’ll spend with real money, instead of running up debts. It’ll become a great habit and will cut down your credit card balance in huge ways. After all, look at your statement. Almost all the charges are for pretty mickey mouse amounts that add up in huge debts – twenty bucks at a time.

7. Destroy your line of credit cheques and unhook the account from your bank card. Your line of credit was set up for emergencies and not for monthly bills. It’s too tempting to use the account if there are cheques around. Because when you use a line of credit for a monthly bill – the next bill will be here in thirty days, while you’re paying the last one off with interest over a year or more!

8. Close your overdraft. I know – it’s like being hooked on drugs. It’s so convenient and always there and you can’t live without it any more. Well, that’s what the banks were counting on, and where they make a huge amount of their profit. But it’s killing you. Just a $1,000 overdraft will cost you between $200 and $300 in interest and fees. It’s a one-time pain to cancel the overdraft, but it’s worth it.

9. Change to a credit card that isn’t a credit card. We’re now averaging three credit cards each, and it’s rising, while card issuers keep upping our limit to make sure we have much less chances of paying them off every month. With no grace period and over-limit charges, it’s a recipe for spending a ton of money needlessly. Get yourself an American Express Green card. That’s not a credit card – it’s a charge card. At the end of the month, there are no payments to make – the balance has to be paid off in full. Oh sure, the first month that’ll be painful. But after that, you’ll watch what you’re charging pretty carefully, and you’ll never ever have a credit card balance again. What’s that kind of financial freedom worth?

10. Contact the credit bureau to get a free copy of your credit report. Almost all lenders now base your interest rate on your credit report and its credit score. So you have to know what’s in there and whether there are errors on your file. The how-to is in the It’s Your Money book and will take under five minutes. Less than 30% of us ever look at our file and that can easily cost us two or three percent on everything we borrow. After all, knowing is always better than hoping.

11. Keep your car for another year. If you believe a cool car is a status symbol and a must-have, you’re doomed to be in debt for decades to come. Not to mention that almost 50% of people trade their vehicle and STILL owe more than it’s worth – that’s financial suicide when you take your extra debt and just roll it over to the next new car with interest for another five or six years. It makes things worse – much worse. And your car will never increase in value. So the goal should be to drive a reliable vehicle that doesn’t have payments with it which are killing your chances to save or get ahead financially. Imagine a couple of years without car payments and the huge financial advantage you’ll create for yourself. And remember: Those $400 car payments are actually more than $600 in gross earnings. If you can’t get a $600 raise this month – here’s a way to get it – you’ll just be giving it to yourself!

Well, here we are at the start of a New Year, and now is a great time to focus on the wave of bills coming this month, and how to make the coming years a lot different, financially, than the past years have been.

But please don’t make it like the wave of fitness club memberships where everyone shows up for a week and by February they’re all a ghost town again. Getting financially set for 2008 is one of the longest lasting gifts you can give yourself. Financial freedom really does change lives and also changes relationships, because the number one fight in relationships is about money!

1. Just once – make a budget. You cannot see where your money is going unless you put in on paper. Half an hour with your partner, no TV, and no kids. By the time you’re done you’ll get some huge surprises of where your money is going and how little you really have to live on, once the bills are paid.

2. Get proactive. Don’t make it a scramble again next year to have money for Christmas or for all your annual bills that we never seem to have money for. Open a savings account but DON’T hook it up to your ATM card. It’ll be too tempting to tap it. Add up what you need for Christmas next year, your annual car and house insurance and your property taxes if they’re not paid monthly or through your mortgage. Divide it by 12 and start putting that money aside monthly.

3. Cut up all but one of your credit cards and learn to live without plastic, and no more borrowing – period. It’ll take a month of whining and adjustments, but by February you’ll be amazed at how much extra money you have and how you start looking at your spending in a whole different way.

4. Put your list of debts on the fridge so it’s right in your face each and every day. Then get mad. Really mad that everyone is getting rich off your money and you’re broke. Start attacking these one at a time, starting with the smallest bill because it’s the one you can pay off the quickest. When it’s gone, roll that money to the next one, and so on. It’s in the budgeting chapter of the It’s Your Money book in easy to follow steps.

5. When you’re in a hole – stop digging. You’ve now stopped borrowing and living on make-belief money with your credit cards, and you’ve got a game-plan to attack your debts starting with the smallest.

Now speed it up. These ideas will make it really clear how serious you are in becoming debt free:

• Have a garage sale and sell so much stuff the kids are getting nervous that they’re next.
• Sell the car with the killer payments and get a $4,000 car you can pay cash for.
• Take any savings account at 2 or 3% and put that money onto your debt. 3% savings vs. 19% interest is an easy choice.
• For at least 90 days, don’t set foot inside a restaurant unless you work there! Think macaroni and cheese – that alone will put you $300 or $400 ahead each month.

Is it worth it? Only you can decide. But don’t tell me that you’re hurting your family when you do this. It’s quite the opposite. Debt freedom and financial responsibility is one of the greatest gifts you can give to your family.