Your Money Book

I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.

The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.

Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.

If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?

That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.

Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.

A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.

A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.

Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.

I hope by now you know my attitude towards credit card balances: Avoid them like the plague, because they’re a huge killer of your cash-flow and rob you from being able to put that money towards savings.

But I also know that stuff happens. And if you’re going to carry a credit card balance, here’s a new card promotion that just came out:

If you got a cool looking black envelope from Capital One, it’s worth digging out and looking through. Capital One has come out with a rate of 5.65% for a three-year term. After that, it’ll go to prime plus 0.9% and the card has no annual fees – that’s a BIG bonus!

As credit cards go, that’s about the best there is. Now it’s not for everyone, because they’ll be looking for an above-average credit score. I’m guessing 720 or higher. It’s not available on-line so you need to have the junk mailer or a reservation and access code if you are on the internet, or you can call their customer service 800 number and see if they’ll let you apply. On-line you’ll get an approval back in three to five seconds. It’s purely based on your credit score.

Customer Service number to call: 800 481 3239
Ask for the Prime plus 0.9% Platinum Card
If you’re on-line: go to: www.getmycard.ca and try using:
Reservation Number: 0010396010736445
Access code: 010603

Part of the reason for this great deal is that Capital One as well as MBNA and JP Morgan Chase aren’t part of the “big five no-service banks” and so they don’t have the access to millions of bank customers to market to. They have to get customers the hard way – one at a time. OK, other than JP Morgan Chase who handles the Sears Cards.

And one more thing: Don’t think Capital One is just a little player. They’re the ones with the endless commercials on U.S. channels: “What’s in your wallet.” And their CEO, Richard Fairbanks two years ago made – are you ready: $280 million in pay for a year.

Yes, there’s big money in credit cards. Unfortunately – it’s your money.

Ah, to be rich and famous. That’s what most people tend to think when we watch entertainers or sports celebrities. But be careful what you wish for, because so often that’s an illusion and an image, and nowhere near the reality of their lives.
Here are a few examples just from the last two weeks:

Serge Federov of the Washington Capital is being sued by Citizens Bank in Michigan for over $2.1 million dollars, claiming he defaulted on two loans.

Michael Vicks, the now jailed Atlanta Falcons quarterback, just filed for bankruptcy on over $50 million of debts versus $10 million of assets. It includes everything from a Royal Bank loan of $2.5 million (yes, I was wondering the same thing) to business loans backing a bunch of losers in everything from liquor stores to restaurants. And Vicks actually had a 10-year contract for more than $130 million before he self-destructed. At least he gets free room and board these days at Levinworth.

Mike Tyson earned over $200 million in his career and has been flat broke for years, even before his bankruptcy filing in 2003.

According to a story in Fortune magazine, singer Michael Jackson is hanging on by his fingernails because a hedge fund recently re-mortgaged his Neverland ranch for the umpteenth time. Supposedly, his equity in the Sony music publishing library has also been maxed out by borrowing against the equity some time ago. Yet over his lifetime, Jackson has earned more than $500 million and right now his debts way exceeds his assets.

Who cares? Well, for starters, it’s lesson number seven hundred plus of how dangerous it is for our kids to make these people our heroes and role-models. That poster of “whoever” in your kids’ room could well be the same person in handcuffs or bankruptcy court one day.

For us adults, it is another reminder that gross income is meaningless. Oh sure, more income should make our financial situation easier. But then, even two-thirds of lottery winners file for bankruptcy within 10 years. It is never about the income but about how much of the money you get to keep.

All these examples, and a ton more, are of people with an incredible gross income and it all slipped through their hands – and millions more after that. How much of what you’re spending is on credit or with borrowed money? How much of your spending is on image, a new car, the expensive vacation, the plasma TV or fancy restaurant?

If you can’t control your income, you can certainly control your expenses. Sometime today, just add up roughly how much interest you’re paying each month to make other people rich and ripping yourself off from keeping that huge amount of money going out the door each month. After all, knowledge is power and we cannot change what we do not acknowledge.

Late last week the Federal Finance Department announced some tightening of mortgage rules, hoping to avoid the risk of a U.S. type housing bubble.

The biggest one is that 40-year mortgages are out. That is, the 40-year mortgages no longer qualify for mortgage insurance when there is less than a 20% down payment.

Now don’t be thinking that’s really sad. We’ve talked about the financial risks of that length of time already. Reducing a $200,000 mortgage to 35-years increases the payments by $40, but saves almost $50,000 in interest. So it’s a good thing – but didn’t go far enough, in my opinion.

The second rule change is that there needs to be at least a 5% down payment. Fair enough – because someone with no money down is buying a nightmare and it’s often speculators who contributed in huge ways to the U.S. housing meltdown, thinking they could buy it and flip it, without ever sticking a dime into the house.

The third one is that not anyone can get a mortgage. There needs to be a minimum credit score. But NONE of the media stories had the score. It took me some time to dig it up out of the regulations.

It’s a minimum score of 620 to qualify. Now nobody needs to panic. 620 is not anyone who has decent credit. That starts around the 700 mark, but it’s a very low threshold to avoid a lot of the subprime mortgages that set off the U.S. market. And subprime mortgages have been growing at 50% in Canada. The score is too low but it’s a great start by the Government, even if it’s a ways too low.