Before I start with this morning’s article, I want to ask you to vote for me in the Free Money Finance March Madness contest. The best personal finance article will win the right to give $1,000 (generously provided by FMM) to a charity of your choice. I have selected a charity that helps children. Please comment on this post with the word “figures”. Thx a million!

The Prime Rate, or Prime Lending Rate, is a term used in many countries to describe an interest rate reference used by Central Banks. This key rate has been a major discussion for the past 6 months, as we realized that the sky is not falling and soon talk about economic growth and prosperity will dominate again. The prime rate is the starting point for all discussions involving mortgage rates (especially variable rates that are directly linked to prime). When discussing interest rates, we usually address debt management and how tough it would be if mortgage rates would climb to 6%+ again …

I don’t really like to play Nostradamus with regards to market trends or interest rates and I’ll show you why today. Recently, Bloomberg asked several economists their opinion on the Canadian Prime Rate and at where it would be at the end of 2010. You can see their predictions in the following table:

Out of 8 highly paid and hopefully knowledgeable economists, we notice predictions of a Canadian Prime Rate between 0.25% (no change) and 2.25% (an increase of 2.00% within one year… or should I say 10 months!) for an average prediction of 1.18%.

So my question is quite simple: how can someone predict no change and another (with the same level of knowledge/competence/tools of analysis) forecast a rate that is 9 times higher? I even read that some economists from Desjardins see the Prime Rate at 7% in 5 years… I guess I should call them to know which stocks will give me a 20% annualized return over the next 5 years. They probably have it written in their black book of prophecy This is why I spoke about Nostradamus!

So what is the point of this post if it’s not to predict the Prime Rate?

The point is to tell you that you will read a lot of apocalyptical scenarios about the interest rate going up since semsationalism sells. The very same people that were convinced that capitalism was dead 12 months ago will try to convince you that we are going to back to 12% interest rates as seen in the 80’s.

In fact, you will probably see a smooth increase in the interest rate as the economy gains its second wind. However, it won’t happen overnight

We still have a fragile economy, high unemployment rate (8.3%) and job creation doesn’t reflect reality as most of them are part time or under paid compared to the lost jobs. In addition to that, do I have to mention that the loonie is strong enough compared to the US dollar that we don’t really need interest rates to give it the final push to parity?

What if we see 10 years of near to zero economic growth as Japan experienced? Oh shoot…. That’s it! I am writing about another apocalyptic scenario on the other side… see how easy it is to predict the future based on rationale?

image source: Xurdle

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

• Is Variable Interest Rate Going Back up?
• What Will Happen With Canadian Mortgage Rates in 2010?
• Bank of Canada cutting its rate again by 0.5% – Canadian Economy on the slump
• Should You Lock Your Mortgage Rate?
• Compound Interest VS Interest Risk

I had read in an interesting report published by well known firm, Breton Woods, comparing the cost of a prepaid debit card vs a regular checking account in the United States. While prepaid debit cards are not a big deal in Canada, I was curious to learn more about why scores of Americans are turning their backs on traditional banks by trying alternatives.

Who doesn’t have a bank account?

There are around 60 million adults that do their transactional business while avoiding banks. I guess that the recent recession helped increase this number and therefore, the popularity of prepaid debit cards.

Most of them are found within minority groups; poor people, people without college education and those who do not really use their bank accounts. As many individuals now work with a day-to-day money management budget, they prefer to keep their cash in pocket instead of having to transact with a financial institution. As making money under the table and receiving cash in an envelope became reality for many of them, a regular bank account seems to be a money-eating-box-of-fees with aggressive appetite!

No bank account, what are your alternatives?

As I previously mentioned the prepaid debit cards gained a lot of popularity in the past decade. It allows an individual to load money on a debit card that is accepted almost everywhere (the access is comparable to a regular credit card). While this option may seem expensive since you have to pay fees each time you reload the card, Breton Woods showed that it is a great alternative for specific individuals helping them save up to 35% in banking fees.

Other marginal options include using check cashing services (like ACE’s), payday loans (very expensive!) and pawn shops. It really seems that we are going backwards as these individuals prefer having cash in their hands regardless of the fees (check cashing services can easily take more than 4% of the amount you want to cash).

So if it expensive, why are they doing it?

In my opinion, there are 2 major reasons why some Americans have decided to give up their banking accounts. The first one is because they have completely lost their faith in the banking industry (can you blame them?). There is an uncomfortable sentiment towards banks since they “got the country into financial trouble”, they were saved in extremis by the Government and paid themselves fat bonus check as early as 2009. Let just say that they didn’t behave like socially responsible corporate citizens!

The other reason comes from a lack of financial education. People who have a hard time managing their money get easily frustrated when paying overdraft fees, NSF checks and other banking fees related to poor money management. Cash or prepaid debit cards won’t “let them down” as once there is no money left, you just can’t do anything!

In the end, I still believe that you are better with a checking account but in some cases, financial education has to start with cash in your pocket!

image source: Sam Howzit

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

• Account Now Review
• A Banker’s Perspective On The Banking Industry
• 10 facts about credit cards
• Why should you want a credit card?
• A New Type of Marketing Aroused In The Banking Industry; Beware!

Yesterday, I wrote an article about the different compensation structures for financial advisors. Another way to know if your financial advisor is working for you is the end result of his follow-up calls. When I call a client, I always make sure that there is an added value for the client. There are 3 major reasons why your financial advisor should call you:

#1 To Offer To Make More Money for You

The main purpose of having a financial advisor is to have someone looking for opportunities while you are working. There are tons of ways to make more money on different things. For example, your financial advisor can offer you:

- A better product for your investment strategy. As the financial industry evolves faster than our brains can understand, there are often better investment products on the market. One shouldn’t jump from one fund to another all the time. However, if you have reach the required amount to gain access to a better investment solution, your financial advisor should be the first one to call you and make sure you benefit from this opportunity.

- Tax strategies that decrease the tax bite. Sometimes, a simple transaction can help you earn a few thousand on your next tax refund.

- To offer a better rate on fixed income. By doing a CD ladder or offering a municipal bond instead of a certificate of deposit, you can earn a better yield without necessarily taking more risk.

#2 To Help You Save Money

This is probably the area where there is a lot of room to improve for many financial advisors. How many times do we realize as clients that we are paying too much for something? Wouldn’t it be nice to have someone suggest switching products before we realize what is going on?

There are plenty of ways to save money with financial services:

- Bank account fees

- MERs on investments

- Mortgage and other lending rates

- Appraisal and lawyers’ fees

- Account merging to reach minimum amounts required for more sophisticated solutions

#3 To Help You Save Time (time IS money, isn’t?)

When someone shows me a trick to save time and become more efficient, that person gets a lot of my attention! So if your financial advisor can help you save time by navigating through the sea of red tape in the financial world, this can mean a lot.

There are always “better” ways to do things. Your financial advisor should be aware of the most productive and effective way to do your financial business. By saving a few minutes or hours here and there, you will be able to do a lot more interesting things with your time.

So, if your financial advisor calls you to offer a new product or give you information, ask yourself: can make money, save money or save time with this phone call. If your advisor gives you good tips on a quarterly basis, you will continuously improve your financial situation ;-D

If he doesn’t do that, there is nothing stopping you from calling him and asking for more help

image source:

sparktography’s

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

• A Response To Financial Nuts – Knowing How Your Advisor Is Compensated
• How To Find A Good Financial Advisor Part 2
• How to Find a Good Financial Advisor Part 3
• How to Find a Good Financial Advisor Part 5
• 5 Reasons Why You Should Consolidate Your Assets With One Institution

If there is something I hate about my job it’s dealing with rate shoppers. But before I start with why I hate them, let’s define a typical rate shopper:

The Rate Shopper:

The Rate Shopper, also known as “the little rat”, lives comfortably in your neighbourhood. It usually has a lot of free time on hand and spends most of its day wondering around. It likes to look at every minute detail and keeps its documents preciously in a file. Since the rate shopper is averse to risk, it feeds itself only with certificates of deposit. It has little financial experience and the only thing it knows is the 5 year certificate of deposit. The rate shopper likes its stable environment and doesn’t want anything else and only looks for the “best” rate.

Each time it has a hunger (maturity date), it comes out of its hole to see where it can get the most generous 5 year CD rate. It can spend a whole week going from bank to bank in order to find the most satisfiying rate. While the little rat is currently starving in the very low interest rate environment, it can walk miles to find a CD with 15 basis points more. The reason we commonly call it “the little rat” is because the rate shopper has no fidelity what so ever. It will seem willing to do business with you, ready to eat your 5 year CD but at the last minute, it will turn around with your “best and final offer” and get the famous 15 basis points more with a competitor without returning your call.

Why Rate shopping is not necessarily a good idea:

As you know already, I am a financial planner. When I started this career, I decided to run my book with one thing in mind: I am not an order taker. My job (and responsibility) is to provide solid and smart strategies to my clients according to their needs in order for them to make as much money as they can by considering their personal situation, their risk aversion and their financial goals. I hate when people call me simply to “get a rate”. Most of the time, I ask them why they want the famous 5 year CD or a 5 year mortgage (‘cause the rate shopper also looks for a great mortgage deal as well). They often don’t have a clue why they absolutely want a 5 year term…

”Because it is the best rate available on the market?”

True. Yes and no. 5 year term products will always provide a benchmark rate to clients at a specific time. However, what if your 5 year CD is due this year? You are stuck dealing a new 5 year CD below 4%… Are you getting such a great deal? I don’t think so. So Rate shoppers will traipse from one bank to another and ask the very same questions without listening to what advisors have to say. In the end, they get the best rate at that specific time giving in to a cash poor financial institution, and they end up with a poor yield strategy… The only strategy they had was to take a week and speak to as many banks as possible to renew their CD.

They not only get a poor strategy but they also might end up with poor rates too. I noticed a drastic change in the financial industry recently. In these rough times, branches take a closer look at their profitability. They started to realize that cutting off an arm and leg to offer a great rate to a new client doesn’t bring any additional income. It is awfully expensive for the branch to acquire this new client in this fashion and the banks nave learned they will lose these clients for a better rate when the CD comes due. This is why I never give my “best rate” to those calling me for a rate. I will give it to someone that is willing to meet with me and hear about other strategies (like a CD ladder or looking for Federal and Provincial bonds for example). Smart investing strategies are beneficial both for the client aa well as the bank. While there will always be branches who will give the shirt off their back to gain a new client, those branches may become harder to find.

Finally, since they are not loyal to any bank, no advisor will actually give them the “time of day”. They will usually end-up at the bottom of the priority list and have already (or soon will…) become frustrated by banks since “they” only want “this” money without providing a good service. Well, rate shoppers hear this: a good relationship with a banker is built through trust and confidence on both sides. Don’t get me wrong; I think you should shop around once in a while to make sure your advisor is on the ball and offers not only a good service but competitive rates. He will usually not be able to offer the best rate on the market each time. But if his offer is in the ball park, you will benefit much more from a positive relationship with a sound financial advisor than swinging your money from one bank to another every 5 years.

image source: turtlemom4bacon

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

• Savings 2009 – The age of the fixed rate bond
• Is Variable Interest Rate Going Back up?
• What Will The Canadian Prime Interest Rate Be at The End of 2010?
• Should You Lock Your Mortgage Rate?
• Shifting Your Investments According To Your Tax Rate

As the economy is pretty slow and most governments want to stimulate the economy through stimulus package and by decreasing their one day interest rate, we are currently benefiting from the lowest interest rate of the last decade (… century?).

We recently observed a small raise on long term mortgage rate (4 years and 5 years). Only a few months ago, it was possible to get 3.55% for 5 years in Canada. Now, we are back to about 4% if you can find a great deal.

So several people are asking: is variable interest rate going back up as well?

The short answer (and the long) is NO. So tell me why mortgage rates went up? Aren’t they following variable rates? Then again, the answer is no.

Long term mortgage rates are following the bond yields as they are similar (important debt amortized over a long period of time with a security attached to it). Since we recently saw an increase of yield in long term bonds, long term mortgage rates followed.

However, the variable rate depends on a totally different thing; the FED in the US and the Bank of Canada. Those entities have control over the monetary mass and the one day “inter-banking” rate. This is the rate at which banks borrow from each other at the end of each day in order to cover (the shortage) or lend (the excess) of money they have in their accounts. Historically, banks variable rate follow (almost) exactly the fluctuation ordered by the FED of the Bank of Canada. Therefore, if the Bank of Canada would raise its interest rate by a quarter, the next morning, all Canadian banks would follow by increasing their variable rate.

So is the variable rate will increase?

Over a short term period, the answer is clearly no. Bank of Canada expressed its wish to maintain the interest rate until June 2010 in order to give a chance to the Canadian economy. On the US side, many experts claim that the raise in the interest rate will only appear in 2011!

But if you want to go further, you must know what the main effect of a rate increase is on our economy. Imagine that you are driving a car at 100mph on the highway (and that cops (regulation) are having a drinking on you so they can’t stop you ). If you brake a little it, your car will slowdown. If you jump on the brakes like a maniac, you might crash your car in the landscape. Then, imagine the economy as your car. When you are driving too fast (and regulators our not “available”), one of the only way to slowdown the economy is to increase the interest rate by a few points (just hitting the brake gently). This is exactly what the Fed refused to do a few years ago thinking it would make our economy crash in the landscape.

But what if you car is driving 20 mph? If you brake, you will completely stop. And this is exactly what would happen in our economy right now. To be more accurate with my analogy, I would have to say that you are driving at 20 mpg, climbing a hill and if you ever brake, you will start going the other way!

So this is why I don’t expect to see the variable rates going up over the next 12 months…

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Related Post

• What Will The Canadian Prime Interest Rate Be at The End of 2010?
• Should You Lock Your Mortgage Rate?
• How interest rates affect our personal finance
• What Will Happen With Canadian Mortgage Rates in 2010?
• Savings 2009 – The age of the fixed rate bond