Should you spend and enjoy life right now?

Should you pay off your debts and save money for your retirement?

What if you die at 45 and never had one great trip in your life?

What if you die at 95, starving in a small apartment for the past 35 years since you hadn’t saved a penny?

How do you balance spending now and saving for later?

First off, am I the right person to tell you anything about this topic? Since 2008, I have increased my debt faster than the Canadian Government. While my assets and my income are growing even faster, I’m not sure that I am managing my budget right now. I spoke of this issue recently in my net worth update; I’m having a hard time managing my bi-weekly paycheck while I am receive 30% of my annual income in a bi-annual bonus. This causes an obvious challenge to balance a budget throughout the year. But in the end, I always payback my debt… go figure!

Spending Vs Saving; it’s all about risk management!

Some will tell you that you are better off spending all your money as you earn it and enjoy life as they know someone who passed away too young to enjoy life. Others will tell you  to live a simple life, pay off your debts and that you will have all the time in the world to enjoy your retirement once you are there.

I think the first group of people is not thinking enough about tomorrow, but they are surely enjoying life to its maximum right now. The latter will never enjoy their retirement. In fact, most of them will continue to save money and live a simple (and perhaps boring) life. After so many years of restraint, it becomes a habit. And many people that are used to this lifestyle and feel uncomfortable when they spend money. So there is no right answer; it’s all about risk management.

Do you want to take the risk of not having enough money at retirement versus taking the risk of never using your hard earned money? This is the right question.

So Where is the balance? The balance is in the bucket!

I think the balance is found when you are able to create a bucket for each goal. At first, you can start with a simple structure of 2 buckets:

Bucket A: Having fun

Bucket B: Saving money for later

The point is to setup bucket B pretty soon:

- establish automatic payments on all your debts (to make sure you pay everything according to the plan).

- establish an automatic investment plan for your retirement account (pay yourself first).

- take out life, disability and critical illness insurance (protect your biggest asset: YOU!)

Then, should you have enough money left over to fund bucket A, have fun:

- extra spending (dining out, clothing, traveling)

- extra (controlled) debt (remortgage for renovation, car loan, etc.)

Bucket A should be a lot smaller and not as restricting as bucket B (which is a major problem for most people; they spend more on hobbies and extra debt than on their house payment and retirement investment account!).

When I look at my situation; my bucket B is pretty solid:

- I have maximized my RRSP contribution (and continue to do so each year)

- I have a solid pension plan

- I have a set payments on my car loan and my mortgage (and I don’t plan on changing cars for the next 5 years or more).

Then, I can play with my bucket A:

- spending on vacation with the kids, clothing budget is on the kids too!

- extra debt to finance my central A/C

My only problem is my credit card debt repayment (which is being done with my variable income). Since 2008, my things have gone a bit sideways but now that I am well established, I’ll have to increase my bucket B and start paying them off within my monthly budget and not wait for my performance at work to use my bonus!

image credit

Get on your knees.

Close your fists.

You are nervous.

You are starting to sweat.

You know it’s coming: a guy with a baseball bat will take a full swing at your face.

How does this feel?

Let me tell you: It ….. HURTS! You wish you were never born!

This is what happens when you track your expenses and calculate them at the end of the year! Well… this is what happened to me last week when I opened my year end credit card statement.

I’m a smart guy. So I spend 95% of my expenses on one credit card; the same credit card paying me tons of points. As I pay it completely each month, there is no harm in terms of interest costs. I just gather points (which I will use to fly away on vacation!). But while I am improving my credit score and gathering points, my credit card also works for me; it tracks down all my expenses for me!

I have a confession to make: I’m lazy.

I’ve used Microsoft Money for about 18 months right before starting my home renovations 2 years ago. Since then, I never opened the software anymore. Why? Because I was able to track all my expenses through a year end statement: my credit card statement. It piles up all my expenses throughout the year and separates them under several categories.

I’ve already told you how I suck at not paying my debts off… well I’m worse than I told you!

My ever-increasing spending has been covered throughout the years because I always got nice, substantial raises. Even last year, I increased my income from 106K to 135K. But this time, I’ve gone too far. Even though I make some real good money, I’m definitely spending too much.

In 2010, I have spent… $57,000 on my credit card! This amount is so huge I still can’t believe it! Here’s how I have spent it:

	Travel	Lodging	Gasoline	Transportation	Restaurants	Groceries and Drugstore	Retails Stores	Other	Total
Total	0 $	637 $	6 186 $	1 440 $	5 678 $	16 471 $	18 534 $	8 468 $	57 414 $

This has to change

I’ve already discussed my financial goals for 2011. One of them is to pay off my debts (especially my credit card debt) by $22,000 in a single year. I will use my favorite gun to fire my debts (increasing my income) but I will also need to cope with spending habits and learn how to save more. I think I can certainly hit the restaurant area as spending close to $500 per month in this category is just ridiculous (especially since I spend a lot on groceries and healthcare at the same time).

Since I want to eat healthier (I’m still struggling with my weight being stuck over 180 lbs), I think I will be able to cut down on dining out. I also want to control my big expenses as I will limit myself to buying central A/C and won’t consider building a garage, a terrace or installing a pool (or a spa).

Have you ever been hit like that? I mean, spending $57K in a year is just stupid! Has it ever happened to you?

#1 Pay off my debts

This is the first time since I started working (back in 2003) that paying off debt is part of my priorities. Only a year ago, I was still trying to make more money to cover for my lifestyle. But I realized something in 2010; nothing is eternal. What if I can’t make a huge bonus at work next year? What if my online company starts crumbling down? What if interest rates hike big time? (I’m in variable rates on all my debts).

While these 3 examples are less likely to happen in 2011, I want to pay off my debts for another great reason: I want to reach financial freedom at a young age. Financial freedom is a combination of 2 achievements:

#1 Being debt free

#2 Having a recurrent income

While I have worked my way to building a solid income stream, I never looked at paying off my debts too much. It’s now time to clear the mark over my head.

#2 Invest in my house

I will use part of my bonus to make improvements to my house. I think it’s important because you spend most of your free time at home. This is why renovating or adding equipment to your home is a good idea. This year, I will work on my landscaping since it doesn’t cost much and I will also install central A/C. I know, I am talking about taming lifestyle inflation and simultaneously announce that I will spend a few thousand on my house…

But having A/C this summer is definitely a must. We had to sleep in the basement for more than 2 weeks last summer. I wasn’t super productive during that time!

What I also like about spending money on your house is that you don’t lose it entirely. When I renovated the basement of my previous property, I made back each dollar spent at the moment of the sale.

#3 Thinking of my kids‘ education

With my 2012 bonus, I will fund my kids’ RESP. I have been neglecting this aspect of my personal finance for too long already. Now that my RRSP is maximized and will be paying off a few debts this year, I will be able to use the 2012 bonus to make sure my kids will have a great future.

Education will definitely not be free and if you don’t save 15 years in advance, the bill will be pretty hard to cover when they reach University. In Quebec, we get a 30% subsidy from both provincial and federal governments. So if you invest $1,000, you automatically get $300 for free added to the account. Very interesting concept!

#4 Investing

A part of my extra income automatically goes to investing. It’s either by maximizing my RRSP or by not taking money away from my online company. While I want to drop my debt level in 2011, I’m still a firm believer that one should start investing before paying down low interest rate debts.

The stock market shows great investing opportunities (just look at my recent stock analysis over at The Dividend Guy Blog to know what I am talking about). I will see how the year goes but I might want to get back to my first idea of restarting a Smith Manoeuvre account…. We will see!

#5 Minimal rewards

There is one thing very important when you make extra money and it is to reward yourself. Extra money often means extra effort, extra hours worked and ultimately, extra sacrifices of time spent away from your family and friends. This is why it is important to reward yourself for what you do. In 2010, I went a little bit too far on the reward side of the equation (new big house, new sports car, new furniture and a huge load of clothing…). This year, I will do it differently!

What do you do with your extra income?

Are you traveling? Buying something? Saving? I’m curious to know what you do with your extra income?

First of all, I’m sure we all know by now what’s considered good debt. What exactly is good debt? Let’s look at each level of supposed good debt to see the pros and cons of it.

Education.

Using student loans to pay for your college education is a classic example of supposed good debt.Investing in your education through loans could be an excellent strategy for increased earnings in the future. Unfortunately it could also cause a steep burden. Let’s look at using debt to obtain an education.

Why this debt can be considered “good”:

You may increase your income earning potential. It’s no secret that going back to school to earn your Master’s Degree or to pick up a whole new education, could do wonders for your wallet. Higher credentials could be just the thing that you need to hit your income goals… and who knows? Maybe even get rich!

You can pursue opportunities you may not have otherwise. From types of work to new business startups, all kinds of new opportunities could come your way once your earn your education. You could enter a totally new field that interests you more or you could move up the latter in your company much quicker.

Why I would argue that this is “bad debt”:

You earn an education that you don’t care for. As you young person you may not consider the financial consequences of acquiring massive amounts of debt to pay for your education. Consequently, you might be in school for the sake of being in school and earn a degree in a field that you’ll never work a day in your life. Is it really worth going into debt for this?

You don’t consider working. Many people often don’t consider working in college. Some will even use debt to live and pay for living expenses for the time that they’re in school. This debt creates a false level of security because this money needs to be paid back eventually.

Home purchase.

A mortgage is the most common form of debt. A home mortgage is also often considered a form of good debt. Actually let’s be honest, many people with a mortgage don’t even consider themselves to be in debt. Has anybody ever purchased a home with all cash? Does anyone consider a mortgage to be bad debt?

Why this debt can be considered “good”:

You can use leverage to invest money in an asset that will appreciate greatly. When you obtain a mortgage on a home and it appreciates greatly in value in a short period of time, you’ve essentially made a solid return with using debt as leverage. This is assuming that you sell the property at the right time and you don’t lose your savings on interest payments.

It’s a solid financial goal. We often have problems with saving money. It’s just too easy to spend money. A home purchase, with the mortgage payments that follow, can be financial goal that we need to start saving money. For some there only investment is their primary residence. A home can often be the best financial decision that some people make.

Why I would argue that this is “bad debt”:

You blow lots of  unnecessary money on the property. From home maintenance (taking care of your lawn) to all of the other costs that go into a home, you’ll find yourself spending lots of money on top of your mortgage payments. This is money that you must consider as you decide if a mortgage really is a form of debt debt.

Interest payments. You must remember that the more money you borrow, the more money you’ll spend on interest in the long run. You’re not borrowing this money for free so you must factor in interest payments into any profits or appreciation that you calculate.

Taxes. The property taxes on a home are enough to cripple some people. This is money being spent on top of everything else.

Other unrelated costs. From a new home entertainment system to repairing a furnace in the middle of the winter, there are many other unrelated costs that go along with a mortgage.

Do you believe that there is a such thing as good debt?

(photo credit: me and the sysop)

Why are you borrowing this money?

Do you absolutely need to borrow this money? Many times there are two viable options to not borrowing money: delaying the purchase or not making the purchase at all. A new car may seem like a good idea at the moment, but is it really needed? At other times the purchase can also be delayed (home purchase) by a few months or years until you have the sufficient funds needed. Of course you run the risk of losing out on a great bargain. This is why you need to clearly understand why you are borrowing this money.

Will you be able to repay this debt?

How steady is your income? When you’re making lots of money and many great investment opportunities come your way, it’s easy to rack up debt to be used as leverage. The critical question here though is whether or not you’ll be able to sustain this income in the long run and successfully pay off the debt? If you have a stellar plan to repay this debt then by all means go for it. You just need to have a backup plan in case you can’t pay off this debt.

What’s the interest rate?

With an amazing credit score you could potentially find yourself a low interest rate on a loan. In my opinion, the interest rate should be a deal breaker. If your poor credit score constitutes a high interest rate, then the interest paid on borrowing this money could be much more expensive than any profits you might gain.

What’s your level of risk tolerance?

Can you sleep at night knowing that you’re thousands of dollars in debt? We all have different levels of risk tolerance. Some of us can engage in complex investment strategies and feel perfectly comfortable with everything. Others get nervous just having to make car payments. Before you borrow any money at all it’s important that you assess your own personal risk tolerance to debt.

What type of debt are you acquiring?

I won’t get into the whole good debt vs bad debt argument. That’s another debate for another day. Why you borrow money and how much you borrow should depend on the type of debt that you’re acquiring. You could borrow money to go for your MBA, increase your income by $20,000+ a year and then pay off your debt with your increased income, and feel great with your new position. You could borrow money to buy a new car and then want to switch cars after a few years. There are many different reasons to borrow money (education, car, home, personal, investment, and emergency). The type of debt you acquire should really dictate why you borrow money and how much you borrow.

Have you borrowed money recently? What’s the deciding factor for you when it comes to borrowing money?

(photo credit: Antoine Hubert)

Looking forward

Since I started working, I have always believed that I could make more money year after year. I started with an annual salary of $30,000 in 2003 and reached $106K last year. This corresponds to a 23% annualized increase in income. This year, I am expecting to make about $130k. While I don’t think I will be able to keep up this pace forever, I have felt comfortable in what I could achieve year to year. This is why I started to borrow a little bit more each year, knowing that I would be able to pay back my debt later on with future income (I know, so far it sounds like a great going-to-be-bankrupt-one-day story ).

What I have done with my borrowed money so far

This is where it gets interesting. Besides gifts and cars, I have used all my borrowed money to make more money. During the last 7 years I have:

- Borrowed 25K to buy land (making 4K profit within a year)

- Borrowed 20k from a line of credit to play the stock market (and generating my initial cash down for my first house)

- Borrowed 25K from my parents to buy my 2nd house (making 75K profit within 5 years)

- Borrowed 30K from the equity of my house to invest in my online company (you can guess how much profit this has generated)

- Borrowed as much as I can on my line of credit (at a ridiculously low interest rate) while I purchasing my employer’s stock (8% of my salary in earning a 25% bonus from my employer, plus stock growth, plus dividends over 3%).

Financing everything that I can so I can make some real money

When you look at my net worth statement, you notice that the bulk of my net worth is in my house and in my company shares. Both result directly from my financing strategy. The problem with financing is not the fact that you borrow money, it’s how you use it. Some call it good debt, some call it leveraging, I call it playing with other’s people money.

Can I fail? I surely can. But I have learned one thing from my parent’s bankruptcy: it hurts, but you don’t die from it. In fact, it makes you stronger. So I don’t plan to go bankrupt, but I know that if it has to happen, I would rather lose everything in my late 20s – early 30s than at 55.

Looking at 2011

This whole introspective about my finances got me thinking of my projects for 2011. I know that I will receive a significant bonus (about 10K net… maybe more). Since my RRSP contributions are already maxed out, I was hesitating either on buying a spa, going on vacation or preparing to build a garage. But now that I have written these 2 articles, I think that I am going the wrong way if I finance “bad debt” and that I would rather pay off my accumulated debt with this 10K so I avoid any bad luck on the financial side .

What do you think? Have you taken any risk by borrowing money in order to make more money?

Image credit

Interestingly enough, I have grown my net worth from $0 in 2003 to $150,000 7 years later. How I was able to build such wealth while financing often and seeking more and more credit? Here’s a hint; the key point is now how much you borrow but what you do with your money. I have always believed that you can do much more money with other’s people money than only your own (especially when you don’t have much in your pockets ).

This year is particular

Before I go on & on with my theory of financing stuff and leveraging, I would have to look back on what has happened this year. It was quite a challenge to manage my budget as I had 4 significant expenses and a huge debt payment to make this year:

#1 My best friend’s wedding (2k)

#2 My wife’s 30^th birthday (1k)

#3 My sister-in-law’s wedding (2k)

#4 Buying a 2^nd car (12k)

#5 Reimbursing my parents (31k)

I could debate about buying a smaller car, giving smaller gifts and concentrating on paying off my parents sooner (I held this debt for 5 years) but those are the choices I made and I had a way to finance everything.

The good news is that I also sold my house. Since I made a good profit from it (about 75K), I was able to buy a new place and finance a part of my expenses. This is why I didn’t really feel the car and gift expenses as they went through my account without hurting my monthly budget too much.

Sure financing a car through your 25-30 year mortgage doesn’t sound like a brilliant finance plan. Sure financing your gifts and debt payment to your parents through low balance transfer credit cards doesn’t sound right either. Actually, it all sounds like postponing the problem until later on. In fact, this is how most people get into financial trouble because there is always a limit of what and how much you can postpone. Sooner or later, you have got to make your payments.

So what’s up with my personal finances? Shouldn’t I be more reasonable?

I guess that you may be right. I guess that there are other ways to manage one’s personal finances in order to avoid borrowing constantly and having a comfortable emergency fund. It surely does sound better from a personal finance blogger / banker, doesn’t it?

I actually think that I have managed my finances the best possible way! Say what? But I won’t tell you how come today… I’ll wait until tomorrow

image credit

The problem with balance transfer credit card offers

 
 
I have noticed that there is one huge catch to making a balance transfer to another credit card. The catch is that we are human! What does this mean? It means that while I might only need to transfer 8 or 9K, I will likely transfer 12,000$ to my regular credit card to ensure I have enough room to pay everything. The problem is that I have just created a $12,000 debt at 1.99% payable in full 10 months (or pay through the nose)… I will have to be very careful to pay it off on time!
 
 
How the credit card balance transfer works
 
 
Once I get my card, I simply have to call to activate the card. Then, they ask me how much to transfer and to which credit card. They make the payment for you so you don’t have to worry about anything. The most important thing is to make sure that your credit card bill is not due on short notice. If you are planning to get a 1.99% balance transfer credit card, I would suggest that you start the process just after you paid your credit card bill. Therefore, it will give you about a month to complete the transfer. In my case, it will take about 2 weeks to have everything completed (the card approved, receive it and transfer the credit card balance over to MBNA).
 
 
I received my card only a few days after calling. When I called to activate the card, they were quite fast to complete the whole process. A big thanks to Trevor and Ticker for the comment on my previous posts about the credit card terms and balance transfer fees. This gave me the occasion to ask the guy what the exact process was. Here it is:
 
 
-         The balance transfer is done within a week. They send the money to the other credit card company by electronic transfer.
 
-         If you miss a payment on your credit card, the 1.99% rate disappears and you jump to the killer regular credit card rate.
 
-         If you go over your credit card limit, the balance transfer deal ends as well and you go back to a normal credit card rate.
 
-         You have 10 months at 1.99%, after that, it’s over. So you are better off not fooling around with this debt!
 
-         There is a fee of 1% of the amount transfered to organise the balance transfer
 
-         The payment to my credit card took 3 days (they say 2 to 5 business days).
 
-          The card is platinum but doesn’t look like one. The design  is not that great
 
-          But, the fact that the card is platinum doubles your warranty on your purchases up to 2 years.
 
 
Overall, the credit card balance transfer won’t cost me too much and it will help me paying off the loan from my parents faster than expected. On the other hand, I will shortly setup a payment plan to make sure I pay off and remove this debt from my balance sheet by the end of the year!
 
 
So if you are thinking about doing a balance transfer, I truly suggest to try the 1.99% MBNA Platinum credit card:
 
 

What kind of options do you have when you are looking for short term financing?

 
You can always rely on a line of credit or a personal loan. My problem is that no bank will lend me money in the short-term right now. How can I make a 6 figure income and yet I can’t get financing? That’s it; TFB is too stupid and spent all his money. This is why he can’t get financing. Sorry folks, it’s more complicated than that: it’s because there is a lot of money I make yet can’t prove.
 
My online company is paying for several expenses and my bonus can’t really be taken into consideration (even though it totals 40 to 50% of my annual income!). They claim that I may not be making this much every year so they can only base their decision on my base salary… reality sucks!
 
So if I can’t get money from the evil banks (and I don’t want to borrow from family or friends since I want to get rid of this type of debt anyways!), I have no other choice but to consider a low apr balance transfer credit card. The main advantage when applying for a credit card is that they qualify you based on your income and your credit bureau (both of which are pretty good in my circumstances) and not on your ability to pay
 
This is why I ran through internet listings to look for the lowest interest rate on balance transfer credit cards. I was disappointed at first, having not found any credit card offering a 0% intro rate for balance transfer for Canadians. Therefore, the best rate I found was 1.99% on all cash advances and balance transfers.
 
There are a few issuers of those generous balance transfer credit cards. Among them, there is MBNA, a well known credit card company (known for their appetite for risk).
 
This is actually why I decided to apply to one of their 1.99% balance transfer credit cards (The MBNA Platinum credit card); because they are most likely to lend me more money than other credit card issuers .
 
So here’s my choice of credit card:

 
 
I have applied for 3 main reasons:

1. They offer the 1.99% rate on balance transfer

 

2. They are more likely going to offer a great credit card limit

 

3. The Platinum credit card doesn’t have fees!

 

 
I have applied today, so we will see how long it takes and how much of a credit card limit they will be willing to grant me. I’ll keep you posted!

After talking about how to deal with money and family yesterday, it is now time to take a serious look at my options in order to pay off the loan from my parents at the end of the year. Gathering such an important sum of money will require a solid plan, discipline and probably a bit of luck as well!

As I previously mentioned, in May 2009 our life took a drastic step back when my wife quit her job to take care of our children. Since then, our personal finance has been somewhat difficult to manage as it was filled with new challenges.

Things have been back under control recently with the deposit of my big bonus cheque in the bank account. Now that my financial situation has reached stabilized, it is time to figure a way to pay my parents back.

What I have so far:

My biggest “savings” is held in the form of my employer’s stock purchase plan. Directly from my pay, I put $475 per month (including my employer’s contribution) aside. So far, I have $5,000 in this account. If I contribute until the month of October, I should be able to put another $4,750 on the table. This would make a total of $9,750. Out of it, I can withdraw up to 75% of its value twice a year in order to keep my privilege. So if I take up to this percentage, I should be able to withdraw about $7,300 in November 2010.

So I now have 10 months to find $22,000.

Whoa, this doesn’t sound right at all… It is actually quite discouraging L. But, there are a few things I should consider:

I have about $5,000 available on my line of credit and I am paying $500 per month in capital. Therefore, in 10 months, I should be able to get another $10,000 from my line of credit. While it doesn’t really count as a paid off debt since I am transferring from one creditor to another, at this point I wouldI rather owe the bank money than my parents!

Now down to $12,000…. Still a huge challenge!

For the last $12,000, I will have to run with the big dogs in the big world of “what if”. Here are a few possibilities that could help me pay my parents back:

-         I am currently looking for a bigger client portfolio, which would increase my annual income by $10,000. While taxes must be paid on this amount, I should be able to put about $3,000 aside from this salary increase (as long as it comes in the first months of 2010….).

-         By November 2010, I will know how much my next bonus will be. If it’s similar to this year, I should be able to pay an additional $5,000 to my parents. While this money will only be available in January, it will be confirmed before the end of 2010 and I will be able to guarantee my parents that they will receive the money.

-         Speaking of my bonus, since it is paid in January, I have to pay the maximum contribution in pension and insurances. Therefore, I will benefit from a higher net pay faster this year. I will probably be able to put this money aside and have an additional $2,000 by the end of November.

-         I will certainly have more equity in my property that should be appraised around 335K by the end of the year. I could probably be able to refinance my property and get enough to pay my parents. However, this is not my first plan as I would prefer to pay this debt off as much as possible rather than switching from my parents to the bank.

-         The last wild card I have in my pocket is how well my online company does. It has been a tremendous end of year and the month of January seems to continue on the same path. I just hope it will continue to grow so I can take a few more thousand out of it by the end of the year!

So as you can see, I will not be able to gather the full $31,000 in cash by the end of the year. However, I have enough options to make sure my parents get paid and that I don’t have to deal with money issues with my family.

I must admit that they have been pretty smooth with me and they told me that I didn’t have to pay them back this year if I couldn’t. However, I just can’t spend money thinking about the fact that I owe money to someone I love and respect. Once this debt is paid off, it will be a huge relief for me!