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Friday’s RR Top 5

Continuing my weekly tradition, here’s my five (in no particular order) favourite personal finance articles in the news and/or blogosphere:

  • Canadian Capitalist answers Questions on Cancelling Mortgage Life Insurance (and others)
  • Kathryn, writing a guest post on MDJ asks: To RESP or Not: Should we be funding our children’s higher education? (You can read my opinion in the comments)
  • Thicken My Wallet gives their take on Personal finance blogs vs. mainstream media
  • Frugal Trader of Million Dollar Journey writes about his first step to Buying a Car – The Research
  • Tax Guy discusses more of the implications if you decide to Cash Out Your RRSP And Pay Down Debt (or if you want to buy a boat like in my Marginal Tax Rate post)
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The Perils Of Revolving Credit

Financial independence is being able to make decisions with your money to do what you want with it, when you want to.  If you’re in debt, your creditors are making those decisions for you.  Thus, one of the first steps towards financial independence is paying off your debt.

People tend to get into the most trouble with debt when they have access to what’s called “revolving credit”.  That is, you ring up debt, pay some or all of it off, then the credit is again available to you.  The typical instruments of revolving credit are: credit cards, and lines of credit.

Of course, when you have credit you’re paying interest on the money you’ve borrowed.  (If not, I’d like to know where you got a 0% rate!)  The worst culprits for getting people into trouble misusing their credit, and charging high interest rates are credit cards.  Department store credit cards can have interest rates approaching 30% interest!  Even your regular Visa, MasterCard, or AMEX likely has a rate around 18-19% unless you have a low-rate card.  (The crux being, to qualify for a lower rate card, you have to have good credit in the first place.)  Lastly, credit line interest rates are commonly tied to prime rate, with a certain percentage added based on your credit risk. (Ex. Bank Prime Rate + 4.5%).

To make things worse, banks and credit card companies often only require you to pay monthly, either just the interest on the money you’ve borrowed, or a small percentage of the balance after the interest has been applied (5% of your balance for many credit cards).  Of course creditors are happy to take your minimum payment since that $500 you charged on your credit card could end up costing you (and thus earning them) much, much more over time!

The moral of the story is: if you only pay your minimum payment, you basically have a snowball’s chance in hell of ever getting out of debt!  So how do you get out of it all?  Fight back with your own snowball!  More on that tomorrow.…

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The First RR Top 5

Well, this ends my first week blogging, and it’s been quite fun so far.  Being an IT “geek” the technical part of setting up and maintaining the blog is just as interesting to me as writing the posts so far!

This week I wrote about RRSPs for a few reasons:  I think they’re a somewhat misunderstood entity, despite their ubiquity.  My RRSP is my first serious foray into investing.  And lastly, I plan on taking advantage of the HBP when we purchase out first home.

And finally, this is the start of what will be a Friday tradition here (and seems to be a popular practice in the PF blogging world!).  I’m going to feature my five favourite (in no particular order) financial articles from the last week, either from the blogoshpere or in the media:

  • Kathryn wrote a guest post on MDJ about some of her Financial Regrets
  • According to Canadian Dream: Free at 45, The Most Important Thing to Get to FI is… you’ll have to click-through to find out.
  • “Will 5-year Mortgage Rates Fall Further?“, was the question of the day at Canadian Mortgage Trends.
  • Canadian Tax Resources wrote about What You Need To Know About Getting a Mortgage
  • Consumer advocate Ellen Roseman explained Your right to a credit card refund

Thanks to everyone who read my blog this week.  I’m enjoying it so far, but start leaving comments and let’s get the discussion going!  Have a great weekend everyone!…

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Recession Over, Bank Of Canada says

The recession is over, the Bank of Canada said in its quarterly Monetary Policy Report released Thursday.

via Recession over, Bank of Canada says.

Click on over to the CBC article to read more details.

What do you think?  How has the recession affected you, and are you still feeling the effects?…

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Snowball Debt Repayment

A very effective strategy to helping you fight your way out of debt is to use a snowball!  That is, utilize the snowball debt repayment strategy.

Think of your total debt as a snowball.  Paying off that debt is analogous to melting away the layers of snow, until it had completely melted.  The key here, is not to use your credit  in the meantime, otherwise you’re defeating the purpose of entirely eliminating your debt.  To curb your spending use another frigid solution: place your cards on ice… literally!  Freeze them in a water filled container in your freezer.  This way, you’ll have to go through the trouble of defrosting them if you need to use the card.  Hopefully this will give you the time to consider making a wiser spending decision.  But I digress…

Now, how do you employ this strategy?  Say you have three monthly debt payments:  a store credit card (such as a Sears or HBC card), a major credit card (such as a Visa, MasterCard, or AMEX), and a bank line of credit.

Listed are the interest rates on each of these debts, and the minimum percentage payment of the balance, and the total minimum monthly payment that you must make (let’s say you must only pay interest towards the line of credit, hence 0% in our example below).

Debt

Balance

Int. Rate

Minimum %

Min. Payment

HBC Card

$750

28.50%

5%

$38.39

Visa

$1500

18.5%

5%

$76.16

Credit Line

$10000

8.5%

0%

$70.83

So, in this example, your total monthly debt payments are: $38.39 + $76.16 + $70.83 = $185.38.

Now, you’re committed to paying off this debt, and have decided that you will allocate $250 per month to do so.  It’s not a significant amount, but it’s all you can afford at the moment.  Don’t worry, it’s a step in the right direction!

Now the snowball part:  each of these debts is one layer of the snowball.  The key here is to pay off the highest interest debt first (the outside layer of the snowball, so to speak), since it is costing you the most money that does not go towards the principal (the original amount borrowed).  Note however, that you always want to pay the minimum monthly payment to all your bills so you don’t get dinged with penalty charges, or worse: collection agents!

In the first month, since our HBC card has the highest rate, we pay the minimum balance on our Visa and Credit Line ($76.16 + $70.83 = $146.99), leaving us $103.01 to put towards the HBC card.  Now, we continue to pay $103.01 on to our HBC card until is has been entirely paid off.  Now’s the time to destroy your card and cancel the account.  Step one accomplished!

Now you continue as before, making your minimum credit line payment of $70.83, and now you have a whole $179.17 to pay towards your Visa every month!  Once it’s done, cut it, cancel it, and concentrate on the credit line!

Now that your other debts are paid, you can contribute the entire $250 per month towards paying down your credit line!

Paying off your debts isn’t easy, but once completed you have control of all your money.  In our example here, it’s like having an extra $250 per month to do with whatever you’d like!  Personally, I’d recommend saving or investing it, but that’s up to you.  It is your money after all.…

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The Benefits Of An RRSP

Continuing from yesterday… (you might want to go back and read it, if you haven’t)

The main benefit of saving to an RRSP is that any amount* you contribute is tax-deductible.  But what does that mean?

(*Note: there is actually a limit to the amount you can deposit in RRSPs in a year.  It’s 18% of your gross annual income up to a certain amount.  In 2009, the amount is $21,000. So if you make over $116,667/year… awesome :) , but you contributions are capped.)

For example, let’s say you earn $50,000, and are in a 20% (fictional, but for illustrative purposes) tax bracket.  This means, come April when you sit down to do your taxes, you’ll find that you owe the government:

Tax Owing: $50,000 x 20% = $10,000

Now, either you’ll have had the correct amount deducted by your employer, or you might have even paid too much tax, and you’ll get some money back in a refund!  But the worst case is, you may not have paid enough tax, and you’ll owe the government.

Continuing the example above, say that you maximize your RRSP contribution (by saving the whole 18%, as mentioned previously)

RRSP Contribution: $50,000 x 18% = $9,000

When you now calculate your income tax owing, you get to deduct (subtract) your contribution!

New Tax Owing:  ($50,000 – $9,000) x 20% = $41,000 x 20% = $8,200

Tax Savings: $10,000 – $8,200 = $1,800!

There’s even more tax savings to be had when your RRSP contribution drops you from a higher tax bracket to a lower one.

Now, you will have to pay income tax on the money you contributed eventually.  An RRSP allows you to defer your tax, that is, the government assumes that when you retire your income will be lower than while you were working and any income, in this case, paid from your RRSP will be taxed at a lower rate.  But the real advantage is that the growth of your investment through compounding interest, dividends, or capital gains are tax free as long as they are held in your RRSP!

If you do withdraw funds from your RRSP prior to retirement, you will pay a hefty amount of tax since it’s counted as income, and will be taxed at your highest marginal tax rate.  However, there are some exceptions! (Of course.)…