The very bank that ever exists for any 10 yr old kid is “The Mom and Dad Bank – funded since your birthday”. This is not always the most generous or the most comprehensive bank that ever been (have you ever dealt with a generous and comprehensive bank anyway?), but this is the only bank that will give/lend money when you are young.

As you grow up, “real” banks will open your doors and allow you to apply for a credit card, a student loan and ultimately for a mortgage. I was 24 when I bought my first home. We just had our son and we were looking for a nice place for him to grow up. Back then, I was able to gather interesting cash down (thx to leveraging!) but I was still missing money to reach the 20% cash down required to avoid CMHC insurance premium. The 20% cash down was also giving me access to the most flexible type of mortgage ever: the Home Equity Line of Credit (HELOC). So this is why I have turned (once again!) to The Mom and Dad Bank.

A Feeling of Guilt

While I was very excited to purchase my first home, I was feeling guilty that I couldn’t buy it completely on my own. We have discussed this issue with my parents and my wife to make sure that everybody agreed on the very same thing: They would lend us the money for 5 years according to the mortgage interest rate in place (they were mortgage their rental property to lend me the money). Therefore, I was free to do whatever I want until November 2010, the date that I have to give them back the money (along with the interest).

It is touchy to mix money with family

While I would have preferred to not borrow from my parents, I must say that everything is going well so far in term of relationship. They were happy to help us out and they are not waiting to get the money back. However, I definitely want to maintain my good relationship with them and I want to pay them back fully at the end of the year as I don’t want to jeopardize everything.

I think the key was to keep a simple and clear agreement with everybody. We have 5 years to pay them back, the interest rate and date of repayment are known and agreed by both parties. Even though you are dealing with family members, I think it is important to not forget that you are also dealing with money. This is why following such contracts is very important to me.

Spending while you are owing

I think the worst part about owing money to someone close is that you feel bad of spending money on vacation, renovating your home or on a new car (the situation is a bit more complicated regarding the car issue…). Each time you spend money, you think that you might have put this amount aside and pay back a debt. I guess this is why I am looking to pay back my parents completely according to the original term of our agreement.

What if I can’t?

Gathering 31K in a single year seems almost impossible at first glance. While I was regularly putting money aside during the first 4 years, I ran into a few speed bumps that made me spend this money in one way or another. I have always thought I had enough time to pay them back “later”. But “later” is about to come to an end as November is getting closer and closer.

Honestly, I don’t think about not paying them back completely yet. I think that I could still manage to gather enough money before November through my online company, my savings and a potential salary increase (yes, I am working on another one at the moment).

Any Thoughts?

I would be curious to know if you have borrowed money from your parents or friend? How you have dealt with it? Did you reimburse in time?

image source: kyz

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This is a guest post from Joel at Credit Card Chaser.

Does it bother you when people not only refuse to take any personal
responsibility for their own actions but even go so far as to blame their
actions on someone or something else entirely?

It seems that all too often when we are confronted with the realities and
consequences of our negative behavior we take the attitude of the comedian
Flip Wilson’s character Geraldine when we say some kind of variant of the now
popular phrase, “The Devil made me do it”. One of the more current
variations of this phrase is essentially that “My credit card company made
me do it”.

For example, “My credit card company sent me some cash advance checks in the
mail so I just had to immediately go use them to max out my card at the
mall. They shouldn’t have sent out those checks to me because they knew that
I would be tempted to use them. I don’t really feel like learning how to manage credit because then that means I have to have
some self control and that is just all kinds of boring. That credit card
company is just preying on people like me. It’s not my fault. My credit card
company made me do it you know.”

Before you say, “Oh boy, here comes another lecture on personal
responsibility. Go tell it to someone that needs it. I am reading a personal
finance blog that has all kinds of stuff on
estate planning, how to choose a financial advisor, and more that I have
already read you know.” and tune me out I would like to quickly take a look
at a few things that I think that all of us could improve on in our lives
and utilize to become better stewards of our money and possessions.

The Natural Way is Not the Best Way

No, I am not talking about giving birth “the natural way” vs. giving birth
with an epidural but rather I am talking about the types of ingrained
motivations that are naturally within each of us (yes, I realize I should
have probably just changed that horrific paragraph header but now it just
seems funny so let’s just leave it ). This may seem like common sense but
it is worth remembering that what comes naturally to all of us are things
like laziness, selfishness, greed, and pride.

It’s difficult to fight the desire to just blow your paycheck on new clothes
or a new TV rather than socking away money into your 401k. It certainly
becomes easier to do the financially responsible thing as you develop strong
habits but nonetheless it can still be difficult sometimes to work hard day
in and day out, live within your means, and plan for the future.

We could all use a reminder that being financially responsible takes hard
work and a dedicated proactive mindset. The opposite of this proactive
dedicated mindset is the mindset where nothing is ever your fault and if you
rack up huge bills on your credit card and don’t have the money in the bank
to pay off the balance at the end of the month then it’s the credit card
companies fault and certainly not your own.

Everyone Should be Held Accountable

Because of the pride that is naturally ingrained in all of us it can be
tempting to assume the high and mighty attitude of, “I would never live
beyond my means and not pay off my credit cards every month but those poor
low income people on the other side of the tracks should not be held
responsible for their actions. They just don’t understand what they are
doing. No one ever taught them to have discipline and self control. It’s all
just the credit card companies fault for preying on those types of people.”

Have you ever caught yourself saving something similar to the above? If so,
it is important to keep in mind that no matter who one is – whether a CEO of
a Fortune 500 company making tens of millions of dollars a year or a gas
station attendant making $25,000 a year it is still each and every one of
our responsibility and ours alone to be held responsible for our own
actions.

Sure, there are unique challenges faced by those with lower incomes than
those with higher incomes but that still does not give those with lower
incomes a get out of jail free card and excuse them of all responsibility
for their actions. There is a right and a wrong. Each of the choices we make
have consequences. These things apply to all of us no matter who we are.

Yes, it is difficult to make next to nothing and constantly see things that
you want to buy but cannot afford without being irresponsible and going into
debt. It is very difficult to even have to tell yourself that your treat for
the week will be a 99 cent double cheeseburger at McDonald’s instead of the
usual Ramen noodles (hey, I was a college student once too and I can
remember the days of working to put myself through grad school while working
2 jobs).

(Note: It may seem like I am reverting to the opposite but equally false
position of what I have just described as if I am somehow absolving any of
the relatively small percentage of credit card companies that practice
deceptive marketing techniques from accepting responsibility for their
actions but I assure that I am not overlooking them. It is despicable and
very wrong for anyone to take advantage of anyone via deceptions and flat
out lies. Period. However, my intention is to communicate some things that
are beneficial for all of us as consumers as we seek to control our own
finances rather than making this a lesson for the credit card companies -
unless of course anyone reading this article just so happens to be the CEO
of a credit card company then just let me know and I will be happy to
redirect my focus )

Think Long Term

What is the remedy for falling into so many of these personal responsibility
destroying snares? I firmly believe that one of the best remedies is to
focus on the long term.

Having a long term focus means weighing the cost of the new flat screen TV
against the decrease in money that you will have available for your
retirement. It means cutting back now to have enough for the future. It
means moving forward by choking down pride and taking responsibility for
past mistakes instead of playing the “blame game”. It means using credit
cards responsibly by finding a credit card with rewards and paying off the balance in
full every month rather than racking up large balances and large interest
charges.

I would challenge myself right along with you to strike the kind of thinking
that says, ” The credit card company made me do it” right out of our
vocabulary and replace it instead with a dedication to not only encourage
the growth of personal responsibility in our own lives but also in the lives
of those around us.

image source: goodnight photography

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If you have ever been to Montreal on a hockey night, you probably thought that we, Canadiens’ fans, are crazy about our team. (and they won 5-1 yesterday… Finally!) Should you pick up any newspaper between September and May, you will find at least 1 article about our hockey team (and when they win, they are on the front page… come to think of it, same thing happens when they lose as well!). Well, I feel that people in North America want to read about finance as much as Montreal Canadiens’ fans want to hear about their favourite team! Everyday, there is something to say about the economy. Since the 2008 market crunch everybody has their take on what is going to happen next. It has created a huge point of interest.

A few weeks back, the Bank of Australia raised their daily interest rate for the first time since the beginning of the crisis back in 2008. Even though, it was a small increase, it was enough to put several financial journalists and financial analysts in their seats to write some forecasts on their laptops (it’s funny to think that they don’t need to find a financial topic to write about… they are given by the 6pm news ). Now we are told that we should consider locking in our mortgage rates.

So, we are now getting everybody’s opinion on interest rates in Canada. About 2 months ago, everybody said that the variable interest rates would remain as is until mid 2010. I even read economic reports showing forecasts of low interest rates until 2011! But now that the Australian Bank raised their interest rate, some people are ready to throw-in the towel scream from the rooftops that we need to lock-in our mortgage rates.

Interest rates don’t rise overnight

I don’t know if it’s because we are overloaded by information, or because the media business model is not very lucrative so they try to become more sensational, but I don’t see how interest rates could suddenly increase by 5%!

Instead of trying to predict the course of the interest rates, I will simply say that interest rates won’t rise that fast. There are 3 main reasons why the Bank of Canada won’t do it:

#1 It would push the Canadian Dollar past parity with the US dollar (something we know will hurt our economy)

#2 They have witnessed the impact of implementing violent moves with interest rates. For the past 10 years, the Bank of Canada is changing its rate slowly to avoid the crisis of 1981-82.

#3 Inflation is still near 0%, there is no need to crank up the interest rate.

So should you lock-in your mortgage rate?

We will all have someone around coming back with the stories of the high interest rate period of the 80’s and claim that we could see the prime rate at 7% in no time.

The thing is that you probably won’t pay your mortgage off over the next 5 years (if you will, then perhaps it’s a different game). And over the life of your mortgage (25 to 30 years), it has always been advantageous financially to keep a variable mortgage rate, (provided you can still sleep at night!)

You can probably lock in your mortgage rate for 5 years at 4.00% right now. However, if you stay with a variable rate, you are paying between 2.25 and 2.75%. So, worst case scenario: you are still paying 1.25% less than a 5 year fixed mortgage rate.

Therefore, if you are about to lock your mortgage rate at 4.00%, I have a prudent suggestion for you:

Calculate your payment at 4% and make this payment on your variable rate mortgage (that is currently much lower). You will then create a buffer and pay off your mortgage faster. You will protect yourself from a rate increase while benefiting from the lowest rate on the market.

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As several of you already know, I have 2 children; William and Amy. What is fascinating about William is that, even though he is only 4 years old, he is already acting like a young consumer (or are consumers acting like 4 year old kids?). When I catch him doing something I don’t like (such as jumping off the couch with the purpose of getting as close as the TV as possible, like scuba diving and swimming in the bathtub or eating cookies while hidden under the kitchen table ), he tells me that he won’t ever do it again.

As long as I am around, it is true that he doesn’t jump off the couch again. He knows too well that a consequence would follow faster than he can run. However, the minute I am gone, one can only guess what he will try!

Going by the title of this article, William represents the average American consumer, I am incarnating the recession. Depending on my mood, I can become the Great Depression or simply a small increase in the unemployment rate . More seriously, there is a question that needs to be asked: “Are Americans spending less because they have learned to become frugal or simply because they have less money in their pockets?”.

2 weeks ago, I had read an interesting article from James Surowiecki from the New Yorker called Inconspicuous Consumption. The author explains that a recession often forces people to spend less simply because they have less money to spend.

If you lose your job tomorrow morning, chances are that you won’t buy a new 50’ Plasma TV to watch Monday Night Football. You will keep your old TV and buy the cheap beer this week. Do you become more frugal? Not really, you are just broke! Would you buy the TV and have the Super Bowl party once you get a new job? If you just lost your job, the answer is “no” but in a few weeks, once the money starts to come into the bank again, you won’t bother much about being a tightwad.

Another interesting point reported by Surowiecki is the serious improvement in many goods that we used to purchase more frequently. Cars for example. Who needed a brand new car every 4 years? If you can afford it, this is fine. But if you can’t, you can easily drive your 8 year old car for miles without many problems. Therefore, you are spending less based on the productivity and efficiency of the products you bought a long time ago. Programs such as cash for clunkers, showed that there were a lot of people waiting for a better financial situation to buy a new car.

The article was relating stories from the times back in the early 90’s saying that America had changed their spending habits and will start spending more responsibly due to the terrible consequences of the recent recession. We are now 20 years later and we still haven’t learned a thing .

So, would American consumers start spending money right after the recession is over? The answer is “probably”. If we simply look at 2009 stats, spending habits have been increasing for 4 months in a row and we are not even out of the recession yet. Will they overspend and load their credit cards like kids in a Toys “r” us? I don’t think so.

The issue is that most people already have a lot of debt. Therefore, they may consider paying them off before buying more stuff. In addition to that, banks will be less likely to offer mortgages at 125% of property values, so the average American consumer won’t be able to get even more money out of their homes like when they were like ATMs. There is no more juice in the lemon and they can’t afford to buy another one.

In the end, recessions will teach us great lessons, however, we are better off writing them down in order to not forget them!

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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…

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