Your Money Book

So here we are just a few days from this years’ RRSP deadline. It’s the one time in the year when the no-service banks stay open forever in order to get our business. But most of us are still scrambling.

On average, our RRSP contribution is about $2,600. If we think about that, it’s a pretty puny amount to invest in ourselves and for our retirement, isn’t it. Sure, there are maybe 20 percent or so who max out. But for the rest of us it really doesn’t matter what the max is – we tend to think of what the minimum is, instead.

But why? It can’t be because we’re just really happy to pay a whole bunch of extra income tax! No, it’s because we don’t have the money! Yet the fundamental way rich people become rich is by paying themselves first. It really is that simple – yet also very hard.

Will bills and all those monthly payments, we are constantly paying for yesterday instead of investing in tomorrow. No that sounds simple, but it really isn’t. When all of our money goes to pay for yesterday’s stuff, there’s just nothing left over. It’s not like we can skip the car payments, not pay our credit cards or the mortgage for a while.

The trick, OK, it’s not really a trick, is to turn this ship around. When we don’t have all those payments, we have the money left over to invest proactively.

If you’re buried in debt and payments, I would never recommend figuring out how to save for an RRSP at the same time. You are way better off taking that money for a year or so and focusing every ounce of energy and every dollar you have to becoming debt free. I’m not saying never put money into your retirement savings but for a year or so you’ll have a way bigger return when you pay off your debts.

If you have a $400 car payment and are putting $200 into an RRSP, you’re trying to do too many things at once. If the car is paid off, you’ll then have the whole $600 for your retirement savings and you’ll catch up way quicker and will have done it much smarter.

For someone who will do an RRSP, just make sure you take the tax return and either use it to pay off some debt or stick it right back into a 2009 RRSP. THAT is how you get ahead.

For someone who is going to get an RRSP loan, consider making it a little smaller this year and also instructing your investment advisor to automatically take some money out of your chequing account for this coming year. In that way, at the end of 2009 you’ll be ahead because you’ll already have the money saved!

Today, I’m going to try to make you smarter than 98% of the population by giving you a real example insight of the business credit crunch. And without giving you a headache or making you sleepy:

Let’s say you’ve got a house full of antiques and know they’re worth around $100,000.

Now, you got to an antique auction in town and nobody is bidding on anything. I mean, you can hear crickets in the place – there’s just nobody bidding and the prices are averaging 60% of their actual valuations.

At home, you can tell all your friends your antiques are worth $100,000, but that’s just talk. For someone that relies on your financial statement, the true value right now is $60,000 because that’s what the last market value was out in the word! In the same way, you can’t count next months’ paycheques on your bank balance today.

It’s a law called Mark to Market and started because of Enron Energy frauds more than a decade ago where they counted billions of dollars of next years’ maybe profits as today’s income. The financial statement now has to show the actual true market value each day!

The logic of this regulation is solid but in our example it’s also totally stupid, right? Well, there’s also a law of unintended consequences and that regulation is responsible for a huge part of the credit crunch for businesses.

Here’s a “today” example of it: Drug giant Pfizer is buying another drug giant Wyeth. One lender was approached to do a $10 billion finance package as part of the sale. Maybe the rate was good, the deal was solid – I don’t know. But today, lenders have to value commercial loans at about 70 cents on the dollar. So the day the loan gets made, if it does, it isn’t a value of $10 billion – it has to be shown as $7 billion. So on paper, this lender has lost $3 billion the day the cheque is written! THAT is a problem and that’s part of the reason business lending has slowed down so much.

One other thing:

I have a great idea but I don’t want to do it alone:

The Washington Post recently featured a story about Katie Wheelock and her family who went two weeks without spending a dime. The original family went a month but how about you join me for seven days of No Spending Week.

Fill the fridge, gas up the car and keep paying your normal payments like utilities, the rent or mortgage payments and car payments. But nothing comes out of your pocket, off your debit or credit card. No Tim Horton, no lunch out, make the tank of gas last or take the bus, no restaurant meals or take out. Yes, on day five or six you’ll need to reach a little deeper into the fridge or further down into the freezer and get a little more creative. But you can do it, I guarantee it.

Now, I don’t want to be a lawyer here but you know exactly what I mean. Try it for a week and you’d be amazed at the lessons you’ll learn and the insights you’ll get about yourself, your habits and the money that just mysteriously leaks out of your pocket. As Canadians, our so called burn rate of a $100 is 3 ½ days! And that doesn’t count what we put on credit cards.

I hope you’ll join me because there’s definitely strength in numbers. We’ll start next Wednesday night to let you go shopping and to the gas station and go until Wednesday March 4th.

In the worlds of President Obama: Yes we can!

Whether it’s in the U.S. or here in Canada, I keep hearing about that “credit crunch.”

I understand it, but I can’t personally find it, and you won’t, either. Not as an individual who has decent credit, with a credit score above 700 and the income to justify making the payment.

In fact, all the talk in the U.S. recently was that the lowering of interest rates to near zero was fueling a huge boom in re-mortgaging. Well, those two stories of a credit crunch and all that refinancing don’t jive. And if I had the resources, I’d gladly put up a reward for anyone who can document being turned down because of a credit crunch. It won’t happen.
Find me a lender who’s got the sign out: Not lending today.

I tried to find it myself. I applied for three car loans and three lines of credit. No, I wasn’t getting them – neither you, nor me need more debt. But I was approved every single time! I’m pretty typical middle class and have a credit score over 720. All the approvals were a no-brainer and took less than five minutes each time.

Challenges for business credit issues are different and do exist. But you and I don’t borrow 50 million or a half a billion dollars. It’s why the government is getting the Export Development, Farm Credit and Business Development corporations involved, and helping them.

Lots of debt also gets sold as asset backed securities. That’s the balloon that blew up in the US housing market. It’s about a $50 billion market in Canada and that’s definitely slowed down. No investors really want to own pieces of these securities right now.

As a result, lenders have to keep their loans or credit card balances on their own books, instead of re-selling them. That is the reason rates haven’t moved down much for fixed mortgages and why credit cards are actually going up. It’s an issue of supply and demand.

If we call it business credit crunch, I’m OK with that. But for you and me – for us individuals, there’s isn’t a crunch, shortfall or lack of money. There’s just a new reality that we need good credit and the money to pay the payment. If lending based on good credit and income hadn’t been temporarily abandoned for a few years we wouldn’t have 90% of the mess we do now!