Your Money Book

Last week, the Royal Bank released their annual survey of Canadians’ spending and savings habits. Now, any survey gets huge media coverage. In most of the major newspapers across the country it was a full five column story whereas I can’t get one column talking about the insights into credit and debt. But more complaining in a minute.

The survey shows that our savings are dropping and our debt is growing. Yes, it’s all backwards. 83% of us worry that we don’t have enough savings and even more than that say they can’t save as much as they would like. Less than half of us have any emergency savings and under 25% have three month’s worth of savings – and that has to be a minimum rainy day fund! Here’s what I’ve been saying for years and now there’s an actual stat: 67% of us think of our credit cards and line of credit as our emergency fund!

Now onto the whining part: Is it just me or is there some huge conflict here? The survey by Ipsos Reid was sponsored by a bank. Banks are in the business of lending money. That is where they make a profit. When we borrow and go broke – they get rich. When we save money – they pay US interest and on their financial statements, that’s a bad thing!

So am I right to be suspicious that banks are preaching savings while all their ads focus on selling their credit cards and debt? Their Sr. VP of Banking was quoted all over the story that us Canadians should save more, rely less on credit and be ready for financial emergencies. You bet, it’s totally right. But does that mean he will change the whole focus of the bank away from debt and onto marketing savings, lowering service charges and expense ratios on their mutual funds, make GIC easier to obtain and stop charging service charges on savings accounts? I’m thinking not! For me, actions always speak louder than words.

If I’m too harsh or out to lunch – I’m two clicks away from sending me a note, because my purpose and passion is not to be right but to make you think!

One of the worst imports we’ve got from the U.S. is the recently marketed 40-year mortgages. But according to the last RBC Homeowner Survey, almost half of all first-time homebuyers are taking this term!

Here’s the bottom line: It’s purchasing a dream home and making it into a financial prison.

Let’s look at the implications for a minute: Just a relatively small $250,000 mortgage over 40-years stretches the payments by another 15 years and drops them only $235. That might seem like a good idea until you do the math, because this small amount of breathing room each month comes with a very high cost of over $177,000 in extra interest.

On this $250,000 mortgage, the total you’d be paying back is $660,000. Now remember that this is net income you use to pay your bills. So in a tax bracket of around 30% you’d need to earn just under one million dollars just to pay off this mortgage. And after ten long years of payments, you’ve barely paid off $20,000 of principal!

Oh – and if you’re past your 20s, a 40-year mortgage likely means you’ll die never having paid it off and having made payments for an entire lifetime. THAT is not a recipe for financial success.

We do whatever it takes to get that home and stop thinking, planning and being realistic about the debt we’re taking on. And I guarantee almost everyone who needs to take a 40 year mortgage won’t be saving anything for retirement or an emergency. Every new homeowner also needs the money for the tax adjustment, legal bill, interest adjustment, buying a lawn mower and the basic homeowner stuff and that $5,000 or $6,000 goes on a credit card or line of credit and immediately forces another $200 payment.

Instead:
-purchase a home for a lower selling price
-pay off one of your current bills to get your budget in line
-save a little longer, harder and more to increase your down payment by another 5%
-will your parents help out? NOT with a loan – that’s just making something bad – worse but with a gift of some down-payment to help you not kill yourself with payments and debt?
As with any borrowing: Just because you can – doesn’t mean you should!

Last week the Bank of Canada issued their bank’s monetary policy report. Kind of an outlook on the near-term future or a state of the economy report, and some of it was very interesting.

The bottom line of their report is that it’s going to become more expensive to borrow and that credit standards are certainly still tightening.

I know the media calls it a credit crunch. But the crunch is banks being reluctant to lend to each other. For us consumers and for businesses, it’s that the days of loose credit standards are gone and won’t be back for a long time. Higher risk equals higher rates. That’s something that I learned the second day I was in the banking business and that was about a hundred years ago. It’s just that the last five years or so – nobody remembered that – or chose to ignore it…

Now, in a time of dropping rates, why would the Bank of Canada state that credit will become more expensive? Simple: The bank losses they’ve had will become ours. In the words of Mark Carney from the Bank of Canada: “We do expect that ultimately they will be passed on.”

What? Did you think all of these lenders all over North America were going to just bite the bullet? No chance! Here’s a couple of examples already:

Bank of America upped their ATM fee to non-bank customers to $3.00 a couple of months ago. Sure there was some whining – but it didn’t affect their volume at all and lots of other U.S. lenders are now following now.

Two of the Canadian banks that I know of, and there may be more, have all increased their service charges on a huge range of things effective this month. Business accounts went up at a couple of them by 25%, and some personal account packages are up over 50%.

Yup, three or five dollars at a time, you and me are going to be paying. It might sound slow, but with millions of customers getting charge it won’t be long at all before you and I pay for all those stupid lending mistakes.
Now wouldn’t it be nice if you or I had someone to rip off when we make a mistake of this size…

If the current U.S. financial pains teach us anything it’s that debt doesn’t just show up one day. It’s almost always the result of poor, or uninformed, borrowing choices.

Understanding the ins and outs of credit will make you amongst the smartest consumers anywhere, and will save you a lot of money in interest, charges, fees, and pain later on.

By the time you say to yourself “if only I had known” it’ll be too late and all the hoping and wishing won’t turn back the clock. After all, nobody else has any interest in looking out for your financial well being. Here are the five most common pitfalls:

-Never assume, or take anyone’s word, for clauses, penalties or rights and promises on anything. Lenders, car dealers or retailers will quickly move on to the next clients while you’re the only one stuck with the contract, the payments and the debt.

-Whatever payments you’re taking on always need to fit your budget or don’t do it. Payments will never magically self-adjust to your real financial situation or money challenges down the road. When it comes to monthly payments, it’s not the time to be wildly optimistic, but rather to stop, think it through, weigh your budget, the cost of what you’re spending in interest and fees and how many years this payment will now be around.

-Remember that monthly payments are exactly the same as taking a big pay cut. It’s money that you still have to earn each month but now don’t get to keep. For years, large chunks of your income are now re-directed to a bunch of creditors who are now getting rich at your expense.

-If a credit offer sounds too good to be true – it generally is. If it seems like there’s a catch and you can’t see it – stay away.

-If you can’t understand the terms – or you’re getting promises that are not written into the contract – walk away.
You don’t speak credit – they do – so you need to get it translated into English. Oh sure, nobody wants to sound stupid or uninformed, but if you don’t do your homework, and ask the questions, paying thousands of extra dollars in interest and fees will always be a lot more painful down the road.