Archive for the ‘Debt’ Category

Changing the Plan

August 10th, 2009

Recently, I’ve decided to alter my savings/investment plan a bit.  It’s been in the back of my mind for a little while, but reading two blog posts recently really got me thinking about it:

In my case: saving cash is the same as borrowing when you have debts.

I have a few debts:

  • canada student loans (low interst, tax deductible)
  • bank student loans (low[er?] interest)
  • credit card debt (high interest)

The credit card debt, we try to keep as low as possible.  As you may know if you’ve read some of my posts, I’m getting married in the next year and recently we’ve been using the credit card for some purchases and deposits related to that and it’s gotten a little run up.

Also, despite these debts I’ve been saving into my RRSP with the intention of taking advantage of the Home Buyer’s Plan and purchasing a home in the next couple of years.

After my savings and debt repayment, I cover my monthly expenses and really spend very little otherwise.

A lot of people might argue that any savings I put into my RSP should be paid against my debt to get it paid off as quickly as possible.  Personally I value owning a home quite highly because the mortgage payments, after interest, are going back into my pocket instead of paying rent into someone else’s pocket.  Many people argue that owning a home is an investment because it does not generate income, and it actually costs you money in maintenance, repairs, etc.  But over the long run, I don’t believe you can accumulate wealth without being a homeowner.

Anyway, back to my point!

I’ve decided to temporarily suspend saving into my RSP with the express purpose of paying off the credit card debt that we’ve accumulated over the last few months.  However, I intend to pay back my missed savings after the CC is paid off.  (I’m due for a back-dated promotion/raise, and will be getting back-paid for it in the next few months and that money would otherwise be going straight to debt right now.)

What do you think of my plan/priorities?  Has anyone else made temporary changes to their financial plans for a specific purpose?

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Posted in Debt, Investing

Student Debt Repayment

July 27th, 2009

Post secondary education is definitely an investment in ones’  future, but the costs are rising each and every year.  Statistics Canada reported that Canadian undergraduate tuition fees in the 2008/09 academic year rose 3.6% from the previous year, after a 2.8% increase in the 2007/08 year. Over the 10 year period from 1998/99 to 2008/08, undergrad tuition fees rose on average 4.4% per year, while inflation in comparison rose 2.3% per year over the same period.

Because of this, it’s not surprising that many students must go into debt to pursue their education.  In fact, the Canadian Federation of Students claims that as of this writing, that the level of Canada Student Loan debt is currently over $13 Billion.  This even excludes provincial and private loans to pursue education, and many students must borrow from multiple sources.

One advantage of a Canada Student Loan versus a bank student loan, is that any interest paid on your loan is tax-deductible (that is, you pay the interest in pre-tax dollars).  Every year, come tax season, the National Student Loan Service Centre (NSLSC) mails out a receipt for the total interest paid on your loans to claim on your tax return.

If you’re like me, and have loans through both the NSLSC and a bank, you may want to consider this strategy to see if it makes sense for you.

Because the interest on your bank loan is not tax deductible, it is likely to your benefit to pay off this loan as quickly as possible, in order to pay as little interest as you can.  However, many students in their first few years coming out of school, likely don’t have incredibly lucrative careers yet.  Hence, you may not have the cash flow to pay as much as you would like to your loans as quickly as you’d like.

Now, when it comes to repayment at your bank, you won’t really have a lot of options: they will likely dictate the term of your loan repayment, and assign an interest rate based on your credit history.  You may even have had a co-signer on your loan (like a parent, spouse, or other family member) whose credit this loan will affect.  The bank will determine what your periodic payments will be, and you’ll start paying!

With a Canada Student Loan, there is the possibility for a tad more flexibility.  If your income is not over a certain threshold, you could qualify for interest relief, where you do not have to make payments for a period of time.  Also, you get to choose either a fixed or variable rate (set by the NSLSC) for your repayment, and can negotiate the term.  If you’ve subscribed to the NSLSC’s Online Services, you can even log on to their website, and customize your repayment terms there.

Now to the strategy:

*Note: Evaluate whether this is right for you.  You may wish to seek outside professional financial advice.

  • Say, right now you’re paying $300 per month to the NSLSC, and an additional $300 to your bank each month, for $600 total.
  • By extending the term of your Canada Student Loan to the maximum they will allow, this will lower your monthly payments.  You will also end up paying more interest, of course, but as discussed previously it is tax deductible unlike the interest on your bank loan.  Say in our example, extending your term allows you to lower your NSLSC payment to $200.
  • This frees up $100 more cash flow each month!  Now, it’s not time to go out and party.  We’re going to turn around and pay this additional $100 on our bank loan, making our payment there $400 total.
  • We’ll continue to pay off the bank loan at an accelerated rate, getting rid of the non-interest deductible loan more quickly.
  • Once the bank loan has been eliminated, this doesn’t mean we have $400 per month to spend on clothes and beer: we go bank and adjust the NSLSC payment to the entire $600 per month, accelerating the repayment of that loan.

By employing this strategy, you could end up saving money spent on interest on your student loans!  Crunch the numbers yourself, or speak to a financial pro and see if this might work for you.

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Posted in Debt, Taxes

Snowball debt repayment

July 21st, 2009

A very effective strategy to helping you fight your way out of debt is to use a snowball!  That is, utilize the snowball debt repayment strategy.

Think of your total debt as a snowball.  Paying off that debt is analogous to melting away the layers of snow, until it had completely melted.  The key here, is not to use your credit  in the meantime, otherwise you’re defeating the purpose of entirely eliminating your debt.  To curb your spending use another frigid solution: place your cards on ice… literally!  Freeze them in a water filled container in your freezer.  This way, you’ll have to go through the trouble of defrosting them if you need to use the card.  Hopefully this will give you the time to consider making a wiser spending decision.  But I digress…

Now, how do you employ this strategy?  Say you have three monthly debt payments:  a store credit card (such as a Sears or HBC card), a major credit card (such as a Visa, MasterCard, or AMEX), and a bank line of credit.

Listed are the interest rates on each of these debts, and the minimum percentage payment of the balance, and the total minimum monthly payment that you must make (let’s say you must only pay interest towards the line of credit, hence 0% in our example below).

Debt

Balance

Int. Rate

Minimum %

Min. Payment
HBC Card

$750

28.50%

5%

$38.39
Visa

$1500

18.5%

5%

$76.16
Credit Line

$10000

8.5%

0%

$70.83

So, in this example, your total monthly debt payments are: $38.39 + $76.16 + $70.83 = $185.38.

Now, you’re committed to paying off this debt, and have decided that you will allocate $250 per month to do so.  It’s not a significant amount, but it’s all you can afford at the moment.  Don’t worry, it’s a step in the right direction!

Now the snowball part:  each of these debts is one layer of the snowball.  The key here is to pay off the highest interest debt first (the outside layer of the snowball, so to speak), since it is costing you the most money that does not go towards the principal (the original amount borrowed).  Note however, that you always want to pay the minimum monthly payment to all your bills so you don’t get dinged with penalty charges, or worse: collection agents!

In the first month, since our HBC card has the highest rate, we pay the minimum balance on our Visa and Credit Line ($76.16 + $70.83 = $146.99), leaving us $103.01 to put towards the HBC card.  Now, we continue to pay $103.01 on to our HBC card until is has been entirely paid off.  Now’s the time to destroy your card and cancel the account.  Step one accomplished!

Now you continue as before, making your minimum credit line payment of $70.83, and now you have a whole $179.17 to pay towards your Visa every month!  Once it’s done, cut it, cancel it, and concentrate on the credit line!

Now that your other debts are paid, you can contribute the entire $250 per month towards paying down your credit line!

Paying off your debts isn’t easy, but once completed you have control of all your money.  In our example here, it’s like having an extra $250 per month to do with whatever you’d like!  Personally, I’d recommend saving or investing it, but that’s up to you. ;)  It is your money after all.

HBC Card    $750    28.50%    5%    $38.39
Visa    $1500    18.5%    5%    $76.16
Credit Line    $10000    8.5%    0%    $70.83

1 Comment »

Posted in Debt

The perils of Revolving Credit

July 20th, 2009

Financial independence is being able to make decisions with your money to do what you want with it, when you want to.  If you’re in debt, your creditors are making those decisions for you.  Thus, one of the first steps towards financial independence is paying off your debt.

People tend to get into the most trouble with debt when they have access to what’s called “revolving credit”.  That is, you ring up debt, pay some or all of it off, then the credit is again available to you.  The typical instruments of revolving credit are: credit cards, and lines of credit.

Of course, when you have credit you’re paying interest on the money you’ve borrowed.  (If not, I’d like to know where you got a 0% rate!)  The worst culprits for getting people into trouble misusing their credit, and charging high interest rates are credit cards.  Department store credit cards can have interest rates approaching 30% interest!  Even your regular Visa, MasterCard, or AMEX likely has a rate around 18-19% unless you have a low-rate card.  (The crux being, to qualify for a lower rate card, you have to have good credit in the first place.)  Lastly, credit line interest rates are commonly tied to prime rate, with a certain percentage added based on your credit risk. (Ex. Bank Prime Rate + 4.5%).

To make things worse, banks and credit card companies often only require you to pay monthly, either just the interest on the money you’ve borrowed, or a small percentage of the balance after the interest has been applied (5% of your balance for many credit cards).  Of course creditors are happy to take your minimum payment since that $500 you charged on your credit card could end up costing you (and thus earning them) much, much more over time!

The moral of the story is: if you only pay your minimum payment, you basically have a snowball’s chance in hell of ever getting out of debt!  So how do you get out of it all?  Fight back with your own snowball!  More on that tomorrow.

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Posted in Debt