In week two of the Kustom Design Level 1 Financial boot camp we covered budgeting, good debt vs. bad debt, and we discussed some advice that is now obsolete.
Below are my notes from the class.
- N = Time/Periods
- I/Y = Interest/Year
- PV = Present Value
- PMT = Payment (negative value)
- FV = Future Value
- COMP = Compute
E.G. How many years if you could only contribute $400 monthly? FV = 700000 PV = 0 I = 6% PMT = -$400 N = 38.05 (38 years 1 month or 457 months)
Top 3 Credit Bureau’s:
- Northern Credit
Steps to fix your credit report
- deal directly with the company.
- order investigation by equifax.
- make a note on your credit report.
Always pull your own score before you go to borrow (soft check).
RBC credit alert notifies you when something happens to your credit score or report.
Improving Your Credit Score
- remains on your credit report for six years.
- a hard check can knock 10-20 points off your score.
- can fall over night.
- good credit will save you money.
- lower interest on mortgages/loans.
- 650 bottom line for most lenders.
5 Main Ares Used in Calculating Your Credit Score
- Your payment history
- Amounts you owe
- Length of your credit history
- Types of credit used.
- Your new credit
Top 5 Ways to Improve Your Credit Score
- Pay all bills on time.
- Keep revolving credit balances low.
- Limit your credit.
- Be focused when you go for credit.
- Manage your credit responsibly and regularly.
Some agreements allow lenders to check your credit when they want.
Brokers are good, they check your credit once then shop it around for you.
If you have a good score you can negotiate a lower rate with your lender. If your write them a letter, then it is documented.
- Open Circle (ever expanding)
- Closed Circle (fixed)
The Closed Circle
- Issue a tracking system.
- Total of expenditures.
- Capture sources of income.
- Determine material wants.
- Determine between Obligations, Necessities or Wants.
- Prepare the closed circle.
- Compare income and expenses.
- you are much more likely to get something if you write it out.
- split and list wants.
Calculate your expenses first.
Only take what you need from your business, nothing more.
When you take good care of what you have been given, you will receive more to take care of!
Overflow can be used for: * eliminating bad debt. * planned giving. * investing. * other agreed upon items that help you achieve your goals.
What about cash flow?
- not all funds come when you think they are coming.
- use your cash flow wisely and don’t go over your budget.
2 ways to increase cash flow: * more cash flow coming in * less expenses going out
incoming cash flow can be active or passive.
Step 2: Eliminate Bad Debt
Good Debt: * Has asset attached. * Is tax deductible. * leverage used to invest. (rental property)
Bad Debt: * Consumer (credit cards) * Non Deductible (Mortgage) * High Interest
You owe $10,000.00 on your credit cards with an average interest rate of 20%. The standard minimum payment for $10,000.00 is $250.00. If that is all you pay each month, it will be 37 years and more than $19,000.00 in interest charges before your balance is paid off.
What if you have more than one credit card to pay off?
- List outstanding credit card balances.
- Divide each balance by the minimum payment required.
- Do this for all of your credit cards.
- List them in order of payments from lowest to highest.
- Apply your extra $10.00 a day to the one with the least amount of payments.
##### Mastercard * balance of $3000 @ 19.99% * Minimum payment of $300.00
- balance at $4000.00 @ 17.99%
- minimum payment of $450.00
- MC $3000.00/$300.00 = 10
- Visa $4000.00/$450.00 = 9
Pay off your Visa first, then your mastercard.
Eliminating Bad Debt
### Don’t be a slave to interest * all credit card interest. * high interest loans, notes and credit lines. * non deductible loans, notes and credit lines. * all non deductible mortgages. * family debt with no repayment structure.
Bad Debt elimination strategies * refinancing at lower interest rates * consolidation * depositing paychecks to line of credit. * smith maneuver
What We Were Taught
- Work hard and you’ll get job security.
- The company pension plan will take care of you.
- Canada pension plan will take care of you.
- save money
- get out of debt
- invest for the long term.
- diversify your investments.
- turn your money over to an expert - someone you can trust.
- you need to have money to make money.
- to good to be true? it probably is.
Why working hard is obsolete advice
- income tax was first imposed in Canada in 1917 on both individuals and corporations, collected primarily by the federal government.
- Canada has a graduated tax system, as do most provinces. (Alberta does not 10%)
- tax rate can exceed 50% annually in many provinces:
- federal and provincial surtaxes
- provincial health premium taxes
- other mandatory government premiums (not officially taxes)
- effective tax rate of close to 60%
- top tax rate at $128, 800 (2011)
- the government has the right to get paid its taxes at the same time as employees.
- business owners are allowed to pay their expenses before they pay their taxes.
- this massive loophole is one of the reasons that the rich get richer.
Therefore, the harder you work as an employee the more you pay in taxes.
Positives: * tax deductions * long term growth for future income * forced savings program
Negatives: * eventually taxed * limit on amount * no collateral advantage * investment restrictions * age and income restrictions * government control * interest on load not deductible * liquidity * cannot claim losses * no tax savings on capital gains or dividends
- interest on loans are tax deductible for other investments but not for RRSP’s
Why “Save Money” is obsolete advice
- after the U.S. went off the gold standard, a dollar saved was no longer a dollar earned.
- Prior to 2000, in fear of Y2K the government of the U.S. printed billions of dollars to keep the economy afloat.
- 9/11, Iraq War and Bailouts the US printed massive amounts of money again.
- at the same time China entered the World Trade Organization and became the biggest creditor in the world and the U.S. became the biggest debtor.
- As our economy floats on the U.S. dollar, the Canadian dollar will continue to be devalued.
- The core Consumer Price Index determines the rate of inflation, but it is missing fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, tabacco products as well as the effect of changes in indirect taxes on the remaining components.
- In spite of house prices doubling, and tripling… and oil going from $10.00 a barrel to $90.00 a barrel, the economists say there is no real inflation. That’s because economists watch the CPI, not the price of assets.
- The bank can leverage your dollars to the tune of 20 to 1.
- The savers lose because the value of their dollar goes down, and the bank has created 20 more dollars from their 1 dollar.
- The more currency they inject, the less it is worth. (supply and demand)
- Buy GOLD!
Why “Get Out of Debt” is Obsolete Advice
- Good debt is money leveraged to make more money such as the real estate investment.
- This is debt that someone else pays for you.
- Bad debt is consumer debt; money spent on consumable items.
- This is debt that you pay for.
- The majority of people think that all debt is bad because they have not been trained to use debt properly.
Why “Invest for the Long Term” is Obsolete Advice
- All mutual funds require fees regardless of whether you earn money or lose money.
- Canadians pay much more for the same services than Americans do.
- It is possible to receive higher rates of return by making your money work for you. It doesn’t make sense to simple hand over your money - to complete strangers - and expect to receive a return at some point in the future.
- You have to be willing to invest in your financial education so that you can see the potential in any oppurtunity.
“Rule number one is don’t lose money” - Warren Buffet “Rule number two is always remember rule number one.” - Warren Buffet “Diversification is required when investors do not know what they are doing.” - Warren Buffet
Why “Diversify” is Obsolete Advice
- Diversification is like going to the racetrack and betting on all the horses; you may not lose much money, but you also won’t make much money.
- Many financial advisors recommend diversification because they don’t have the ability to pick the winner.. so they play it safe and recommend that you “bet on all the horses”.
- There are three basic asset classes:
- Paper Assets: promissary notes, bonds etc.
- Real Estate: raw land or buildings
- Businesses: publicly held or private
The five biggest markets to invest in are: * The Stock Market * The Bond Market * The Real Estate Market * The Currency Market * The Commodities Market
The Smith Manoeuvre
- Get a re-advanceable mortgage
- Liquidate non-registered assets (like stocks held outside of an RRSP) into cash.
- Use this cash as a down payment on your mortgage.
- Make mortgage payments like normal.
- Re-borrow $1 for every $1 of mortgage principle you pay each month.
- Invest that borrowed money at a higher rate of return than the loan interest you pay.
- Deduct your investment loan interest and use the tax savings to pre-pay your mortgage.
Repeat steps 3-7 until your mortage is paid off!
This one is a little confusing, because now you have an extra interest payment to make against the line of credit portion of the re-advanceable mortgage. I’ve read that you’re supposed to capitalize the interest by borrowing from your line of credit to pay the interest payment on your line of credit. This sounds very risky! - mo