It is now the third day in a row that I am stripping my financial situation to my readers. By now, I feel that you probably know more about how I manage my personal finance than my own banker and accountant put together 😉 But I really think that there is no such things but real examples to help others managing their personal finance. While I do not pretend that I know the very secret of financial freedom, I am definitely after it! And if I ever succeed, you will be the first ones to know about it!
The very first thing I was happy with was the fact that my property increased in value and was now at 275K. That is bringing my net worth a little bit over 39K. With a little help of my bonus, I will finish the year 2007 slightly over 40K. If you recall from my first post about restructuring my debts, I had monthly obligations of $1,915. With the new HELOC, I will have a minimum payment of $780 a months if I was to decide to pay interest only (I pay only 4,25% on my HELOC). However, I decided to make a monthly payment of $1,500. Therefore, I would decrease my monthly payment by $415, not bad huh?
Unfortunately, the whole $415 will not be applicable on my $1,500 project. As I previously mentioned, I quit my second job in July but I never replaced this income. Therefore, I will have to come back with additional calculation in regards to my project. The good news is that I know that it will still decrease my overall payment and definitely enable me to increase my saving capacity.
Starting in January, I will be able to put back my original monthly investment with my Smith Manoeuvre, About two months ago, I had to decrease my investment in order to increase my available cash flow. I dropped it down to $400 even thought I did not like the idea of getting late in my parents loan repayment schedule. By investing $600 on a monthly basis, I am assured to be able to pay at least the 25K in capital back in three years. In regards to the interest, I would just have to continue paying them back for another year in the very worst case scenario.
In the best scenario ever, The Bank of Canada will decrease their rate (I heard rumours that it might happen shortly!) and prime rate would drop to 6%. This mean that I will pay only $733 in interest and that I will be able to increase my Smith Manoeuvre payment up to $700. This would definitely facilitate my loan repayment and I would only have a mortgage and a very cheap line of credit left at the age of 30 (Hum… this will be time for a BMW then ;-D). I told you, I am not very frugal 😉
I am well aware that I will be paying more interest over time with this technique. However, I give more importance to my present lifestyle than my future interest payment. I see personal finance more on a cash flow management perception than an absolute way to create wealth. If I can manage to have my wife stay at home next year, I will surely be more happy than if I save a couple of thousand dollars in interest charges!
|Yesterday, I presented my net worth situation. Now that I feel completely naked (financially at least), I will explain what I did and why I did. When you are using your property to refinance your debts, two major things will happen. The first one is that you will decrease your monthly payments as you are amortizing your other debts on a longer period. The second is that you will end-up paying more interest at the end of the line.
|It’s all a matter of lifestyle VS interest paid after 30 years.You have to make a decision in regards to this manner. I picked the lifestyle 😉
Consolidating your debts through your property is fairly easy. The first thing to do is to meet with your banker to know if you qualify of not for a bigger amount. As you are already owing this amounts in debts, chances are that the bank will grant the increase on your exiting mortgage conditional of paying most of your debts. By doing so, you will take debts that are usually set over 5 years or less and amortize them over 25 years. Your monthly payments could decrease significantly depending on the amount of debt outstanding.
In my case, the bank requested a recent appraisal of my property as I was requesting 80% of the value as a HELOC. The appraiser came and did the report. I was a bit disappointed with the value we got (I was expecting about 5-7K more) but it was more than enough to do my plan. In only one year and without any modification to my property, it gained 4,5%. My house is now at 275K, making my net worth jumps a little bit over 39K. It is even better considering that I paid 255K last year (even though the appraisal showed 263K). Therefore, I made 7,8% on my house this year.
But the most important part is that I was able to increase my HELOC from 192K to 220 and liberate an additional 28K from the equity in my house. To my opinion, the equity lying in your house is the equivalent of pilling up money in a safe in your basement. You earn no interest and you can’t do anything with it. I think you are better off using the maximum equity from your house for other project.
With this 28K, I will do two things. The first one is that I will pay off my heavy 25K loan at the bank with a monthly payment of $650. When I contracted this loan, it was for 32K and I was working two jobs. I was using the income from my side line to pay off this loan. Now that I quit my second job in July, I do not have this extra cash flow to pay off this loan. This is why I will include it in my HELOC.
I was paying 6,25% on the personal loan and I will drop it to 4,25% once it will be within my HELOC. I would have the opportunity to create a sub-account in order to keep track of this loan separately but I need to amortize it over 25 years in order to reduce my monthly cash flow. With the remaining 3K, I will do something else but it is beyond the scope of this post. I’ll tell you in January!
Stay tuned as tomorrow, I will reassess my situation and show how I decrease my cash flow by using my property to pay off my other debts.
|I will start my explanation with some facts for today and I will post the strategy and the result in the following days. I was a bit reluctant to post about my assets and net worth but I thought it could help many people to get started. In fact, I really started to build my net worth about a year ago (when I sold my first house). Having two kids obviously make things more complicated. Nonetheless, I think I have a pretty good plan for the years ahead. So here my situation before I decided to do anything about it.
Here’s a quick peak of my financial situation prior to restructuring my debts and increase my HELOC:
– Personal loan 25K with payment of $650
– Personal line of credit of 20K with a balance of 18K (I am paying 3,25% on this one, so I only pay $65 a month)
– HELOC of 192K with a balance of 190K (remember, I am doing a Smith Manoeuvre) with a monthly payment of $1,200
– Loan from parents of 25K, not payments required yet (agreement to pay in full in three years with an interest rate of 4,8%)
– Total debts: 260K (I do not have credit cards balance as I pay them in full on a monthly basis). for a monthly payment of $1,915.
– Bank account : 1K
– Smith Manoeuvre investment account: 4,7K
– Stocks: 1,5K
– RRSP (mine): 6K
– RRSP (Wife): 2K
– Car: 9K
– House: 263K (last year’s appraisal value)
– Total assets: 287,2K
– Net Worth : 27,2K
While my net worth is not very impressive (I am actually not very happy about it!), when you put it in perspective of my age (26), I think it is not too bad. My goal is to use my SM investment account to pay back my parents in 3 years. I borrowed 25K from them 2 years ago. Therefore, it is a 25K loan over 5 years at 4,80%. In 3 years, I will owe them 31K with interest.
As I want to keep up with my $1,500 project I need to increase my cash flow. The interest rate I pay on my debts are all minimal since I am working for a bank. I will leave my line of credit as is since I pay only 3,25% on it. My second best interest rate is my HELOC with 4,25% (Prime rate – 2). This is why I decided to have a second appraisal done on my property to pay off some debts. We will see the result tomorrow.
The funniest part about taking your time and energy managing your personal finance is that you become more inclined to make money mistakes. The idea behind all this is fairly simple; the more you know about finance, the more you want to make things by yourself. Sometimes it works, sometimes it doesn’t. Today’s post is in related to Canadian Capitalist 3rd year anniversary contest where he was asking bloggers about their money mistakes. I thought it could be interesting to write about how I dilapidated ten thousand dollars a few years ago. Yes, I lost ten thousand loonies in a single decision at the age of 24 when I decided to sell my house with a real estate agent.
|Selling in a hurry
It all started when my wife and I fell in love with a house in our neighbourhood. We visited the property and made an offer the very same day (and we got late for our Easter supper with my parents!). The next morning, we put our own property for sale in the hope of a fast sale. We put it in the newspaper, on the internet and even tried the TV! After three weeks, we had about five visits and several phone calls but no offer yet. The owner of the house we wanted to buy we still having visits and phone calls as we only made a conditional offer. After a month, even though we already spent about $1,000 in ads, we decided to accelerate the process and give the mandate to a real estate agent. Big mistake!
No results whatsoever
I wrote in my introduction that I have a tendency of doing things myself when it comes down to finance. Well I should have done it in this case! We kept having the same rate of visits per week and most of the time, the potential buyers were coming from other agents, not even ours! In the end, it took him four additional months to sell our property and he convinced us to drop our asking price by a couple of thousands in order to make sure we don’t scare the people away.
How much does it cost?
Since he “sold” my property, I had to pay him a pretty fat commission. 5% of the selling price were making 10K that I could have keep for myself. Instead, the agent simply created additional miscommunication between all parties. In result of this communication breakdown, I had to pay an additional $600 in interest penalty to the buyers. This fee could have been easily avoided if communication were related to each party properly. As we have no right (or so every agent is telling us) to contact the other party without going through any real estate agent, it just creates a big mess.
The reason why it is my favourite money mistake is because even if I loss 10K out of this story, I learned a lot from it:
#1 The use of a real estate agent does not accelerate of your property
#2 They cost way too much for the service they provide
#3 They add more confusion and miscommunication as the buy and the seller can not talk to each other directly
|After creating my series of four posts on Primerica, I received several email from readers asking for more details. Again, I will try to make the most honest conclusions on the topic without trying to bash anyone. I use rational arguments and strongly suggest Primerica Agents to comment on this blog. I know people working for several financial institutions as well as insurance and investment companies. I will not make direct comparisons with other companies as most of them work with similar business models. What really differs from one to another is their culture because financial products are alike across the industry in Canada.|
Does Primerica have a commercial advantage?
According to their sales pitch, they do. If I sit down and I listen blindly to what they have to tell me, they will explain that they are not there for the money (but will later brag that they are making 6 figures by working minimal hours a week) since they really care about people. They want to help out people with their debt and bring them to a better financial position. They pretend that you only need term insurance and that the rest of the products are useless. Therefore, they don’t sell any other options or so they say, (because I heard they have them too).
The truth is that if you sit down with an advisor from another company, they will more likely tell you that they place the client in the center of their business. Their goal is to meet their client’s needs. Well duh, have you ever heard somebody saying that his main goal is to sell a low cost product at the highest price no matter what the client wants? Seriously! All that to say: any personal finance company will consider their clients as the core of their business. It is crucial to build a network to survive in this world. Primerica says they are there to help, some proclaim that they are providing clients with professional help; others will explain that their goal is to keep their clients as happy as a pig in s?!^.
In fact, Primerica does not have a commercial advantage compared to other companies. The truth is that if a client Googles Primerica compared to most companies prior to the meeting, the Primerica agent will have a hard time selling anything!
Can you build your own business within a company other than Primerica?
Primerica is advertising the “build your own business” model. It is up to each agent to create their own office and run their own business with their own employees and their own clients. Most companies in the personal financial field do not offer this “opportunity”. If you want to manage employees, you can become a “team leader” or a “director”. These positions are still commission based but since you are also a recruiter for the firm, they will pay you a commission on your team’s sales in addition to your own. You also have the possibility to go higher up in the company and become a regular salary-based employee.
In fact, Primerica is more or less supporting the same system. The office that you “own” is rented and displays the Primerica banner. “Your employees” are self employed / commission-based employees that are totally independent. Finally, “your clients” belong to Primerica. In their contract, it is clearly stated that if you leave Primerica, you are leaving your clients with Primerica as well. Hmmm, sounds to me more like a franchise than anything else.
What is so different in their commission structure?
If you want to meet with clients, write financial plans and close deals, Primerica is definitely not for you. You do not really have to write financial plans since everything is populated from the Primerica system. And when you close deals, you are making less money than you would with any other company. Commission rates are very low since you have three other people above you that will eat a part of the cake you just baked. These individuals have to be compensated from somewhere. Guess what, Primerica is not giving a penny to them, you are financing their “team leader”, “regional director” and “VP” positions.
So, unless you want to become a full-time recruiter, the commission structure is much better with other companies. And if you recruit people, you have to convince them to sell with under-paid commissions. Sounds like a real challenge, doesn’t it?
Please share your comments, and once again, I encourage Primerica advisors to explain what I am missing about the system.
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