How to build a solid financial base?

Here is a disclaimer before you begin reading; all financial advisers and generally people have different definitions of “good financial position”, so you do not have to agree with anyone. You can take bits and pieces of different opinions and create your own but please be honest with yourself.

We all should be working towards a solid base of our financial situations. We are going to call it “building a house”. You can’t build it overnight, it takes bloody years, but if you keep working towards the goal you will get there, I promise.

earthquake-1665871_1280There are steps that you need to take to build this house. You can’t skip steps because if your house doesn’t have a solid foundation it will crumble and fall. Unfortunately, people skip steps and then get angry that they work hard, however,their house is not becoming more secure or in our case they work and get paid but have nothing to show for it.

Step 1

The first step is getting the tools that will enable you to begin the construction of this house. These tools are called….here it comes…budgets. People dislike budgets because they either don’t know how to create one or they feel it will restrict them. The fact of the matter is that if you are experiencing anything negative when it comes to budgets, well then you most likely didn’t do it right. Think of it as putting on shoes that are a size too small. If you get the right shoes, you will enjoy them and most importantly you will get far. Without a budget you can’t get anywhere so skipping this step will constantly set you back, there is simply no other way around it!

Step 2

Pay off your credit cards and loans, all of them! The reason I didn’t say all your debt is because a mortgage is a long-term debt and that one needs special attention and a lot more time.

Step 3

Start saving accounts. You will need to decide on a savings system that will work for you. Some open multiple savings accounts, auto savings transfers etc. More is to come on this topic.  We will look at different saving methods and options.

Step 4

By the time we reach step 4 you are at the move-in phase of your house building. This is where you get to make design decisions in the form of your financial goals and what you would like to achieve. This step is going to be different for everyone, some may concentrate on paying off their mortgage, perhaps purchase their own place if they don’t have one yet or maybe it would be buying a second property for rental income purposes. You may also be interested in saving up enough to go on a 3-year travel trip or whatever it is that fancies you. Once you get to this stage you have most likely learned so much on the way that you no longer need further guidance and can make the right decisions.

Each step will be further dissected, so you can have a clear idea of what happens and what you need to do along the way. Stay tuned.

How does a credit card work?

Let’s look at the anatomy of credit cards. Please keep in mind that this is based on the Canadian and U.S. credit cards, in Europe, credit cards work differently.

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What is a credit card?

When you get a credit card you are borrowing money from the bank. When you use your credit card to purchase coffee, for example, the bank pays the coffee shop on your behalf. You have a 30 day grace period, at the end of the grace period, you need to pay the bank back  for all the purchases you have accumulated over a period of time (usually a month) If you do not pay it all back, the bank will charge you a fee in the form of interest.

Credit cards are NOT FREE MONEY. I can’t tell you how many people perceive it as free money. I’ve seen it way too many times during my years working at a bank.

What is a grace period?

The grace period is usually 30 days, which means that the bank will not charge you interest for 30 days after the purchase. For example, if you bought coffee for $5 and paid with your credit card, you have 30 days to pay the bank back the $5 without additional fees. If you go over the 30 days, then you will pay $5+interest (on average around 20%).

What really happens if you do not pay off your credit card in full?

You will still need to pay a minimum payment. The banks tell you that if you pay the minimum payment every month then your credit rating will be good. Here is the deal, it will be good, but it will not be very good and you want your credit rating to be very good or rather excellent if possible. There will be a separate post about credit ratings, what they are and what impacts those ratings.

If you do not pay in full, you will be charged interest fees, those fees add up and get people in trouble and then they end up running in a wheel of interest payments like hamsters in wheels. This is how you get yourself into debt!

What is a minimum payment? 

A minimum payment is a sum of money that you have to pay the bank to keep the credit card and not destroy your credit ratings. There are generally two ways minimum payments are calculated:

  • the bank calculates 1% – 3% (depending on the bank) of your total money owed and that becomes your minimum payment. For example, if you owe $1000 your minimum payment is $10 to $30.
  • the second method is 1%-3% of your total + interest from the previous month. Let’s say last month your bill was 550$ and you only paid 50$ so you have 500$ still to pay. Over the month you spent another 600$ so now you owe $1100. Your minimum payment will be as such: 3% of your total balance  ($1100) + interest (20% APR) on last month’s outstanding balance ($500), so $33+$8.33=$41.33 is your new minimum balance.

How is interest (APR) calculated?

APR stands for annual percentage rate. This means if your APR is 20%, the bank charges you 20% interest a year. So if you have a balance of $1000, over a year you will be charged $200 interest but on the statement, it is broken down by month. You will see $16.67 interest charge, $200 divided by 12 months. Of course, the balance will change month to month, depending on your statement so what they do is take your previous month’s balance (the amount that you still owe to the bank) multiply that amount by APR (20%) and divide by 12 months, thus come up with your interest amount for the month.

Credit cards can be great when you get all kinds of perks in a form of travel points or cash back. If you use them wisely, you will get these benefits. If you do not, you will get yourself in trouble, the benefits are going to be mere specs of glitter as you get swallowed by debt and totally not worth it.

Keep track of your credit card spending. It is easy to go on swiping that plastic without actually keeping an eye on how quickly purchases add up. Do not spend more than you are able to pay off at the end of the month. Once again, CREDIT CARDS ARE NOT FREE MONEY!

 

Worried about the future of the economy? What you can do to protect yourself

Recently, I’ve been reading a book called Manias, Panics, and Crashes by the brilliant financial historian Charles Kindleberger. He states that based on historical data, financial downfalls happen every 10 years. If you were thinking that you may be lucky enough to be a generation where a major financial crisis doesn’t affect you, well you are wrong. Sorry to burst your bubble but the reality of today’s economic policies, unfortunately, do not protect us. When I say a major economic crisis you are most likely thinking 1929 stock market crash or perhaps the most recent 2008 crisis, an event that affects a large number of people.

Here is the reality, difficulties in the economy occur every 10 years and major ones occur perhaps every 25 years. This means that in your lifetime you are most likely to encounter at least 2 major downfalls. You need to be prepared to keep yourself and your families afloat during such periods. It is your responsibility to secure yourself and not the responsibility of the government or the policy makers. Please DO NOT think that if everyone is in a shit hole during those times that it is okay for you to be in one too. Be responsible, stop living in denial and ensure that you can get through the next crisis without losing your home. Make sure you do not become one of those people interviewed on TV saying they are now living in a van with their children because the economy fucked them over. The economy doesn’t fuck anyone over, people put themselves in these positions by being ill prepared. Let us take a look at a few ways (out of a thousand) on how that happens.

  • When the economy is booming and everyone has jobs people do not bother to save for the rainy day because they are having too much fun with the economic rise which always seems like it is here to stay forever.
  • People buy houses that they can not realistically afford but they buy them because “the bank gave me the mortgage, this means I can afford it”. If the bank gave you the mortgage it does not mean that you can afford it…just look at the U.S. (housing crash) and how they got themselves in trouble by trusting the banks.
  • Salaries rise and job opportunities multiply allowing people to bring more money home. If the habit of controlling the spending and a budget is not in place people find that no matter how much they make it all gets spent. Maybe you have met people who tell you that they are broke all the time, while, it seems they have been getting consistent salary increases in the last few years, they never seem to have enough? Doesn’t make sense, right? People who do not have budgets, spend more money on casual items. These items are not accounted for and do not increase the financial security of the person in the long run. It’s a bloody trap that I will go further into in my next post.
  • Most importantly people do not educate themselves. They don’t bother to find out the basics of how the economy works or how they get ripped off by the banks. They simply walk around ignorant, because it feels complicated, it requires time and most would rather watch YouTube videos, Netflix or the latest episode of The Walking Dead.

Let me make something clear, I am not against banks! Understand that banks are a profit based organization, they are a business. Banks are interested in making money, just like you would be if you opened a business. They need to make a profit and not babysit you or provide you with a free social service.

You may think that economic crashes occur because some big financial policy failed or another war began, something that has nothing to do with you. In a way yes, absolutely, you are correct BUT you have played a role as well. If people took the responsibility of their financial security and planned for the hard times they could keep their businesses open for longer and keep their employees. They would be able to continue paying their mortgages and not lose their houses as well as keep their kids in dance lessons thus keeping people employed. Overall, the snowball effect would be either majorly delayed or the blow wouldn’t be as hard.

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What you should do to prepare for the next wave of layoffs is educating yourselves and getting your finances under control and organized. The goal of these articles is to provide you with that minimum quantity of information, enabling you to make independent and educated decisions.

Please Like, Share and Comment if this article made you think or if you found it useful and entertaining.

Pay off a credit card or start saving?

I’ve been asked before “Should I start saving money into a savings account or work towards paying off my credit card?”. The answer is very simple. You do not start saving until you have paid off all your credit cards. Some of you are thinking, “Well yeah, that’s no brainer!” others wonder why?

Here is why…

I strongly believe that a dollar saved is a dollar earned. Every dollar you save in interest payment is a dollar you have earned. Let’s do a bit of math (I will do the math and you just need to follow) to understand why paying off credit cards is always better than saving or investing your savings.

Pretend you would like to start building a savings account and put away 100$ every month for one year. However, your credit card has a balance of $3,000. Now let us explore the two paths we can take and what we end up with at the end.

Thanks to The Calculator Site here is the breakdown of your savings account balance:

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The interest on savings accounts is compounded monthly. What this means is that you will earn interest not only on the money you have deposited into your account but also on the interest that you have earned previously. For example, if you have earned .17 cents in interest on a $100 deposit one month, then next month you will earn interest on $100.17 cents.

The calculations above show us that if we save 100$ every month for one year into a savings account that gives us 2% interest (which is more than a typical savings account in today’s reality), you would have $1,213.08 at the end of the year. $1,200 of your saved money and $13.08 is the interest you’ve earned.

Now let’s look at what would happen if you do and do not put the extra $100 on a card that has a balance of $3,000 with $60 minimum monthly payments and the typical 20% interest.

Paying only the minimum payment of $60 a month:

  • Total interest paid over one year: $588
  • Balance on the card remaining at the end of the year: $2,868

Putting the extra $100 on top of the minimum payment results in:

  • Total interest paid over one year: $471
  • Balance on the card remaining at the end of the year: $1,552

This means that you would have saved $117 ($558-$471 = $177) in interest! Not to mention that your balance is significantly lower now.

Remember when I said a dollar saved is a dollar earned? Well, you would have earned $117 by putting extra payments on your credit card over $13.08 of interest earned from the savings account.

I hope this makes sense and you can now see why saving money while carrying a balance on your credit card makes no sense.

 

 

 

Accepting the odds of your success rate

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This is you on top of the world at your graduation!

Our generation gave up! Gave up the idea of living debt free, with zero balance credit cards and maybe even owning a home. Many of us have graduated, found our first junior position job with base-level salaries and feel like we are drowning in debt before we even got started. Some were spending while being in school thinking, “Once I graduate I will make enough money and pay everything off quickly.” Now you are graduated and have anywhere between $10 000 – $30 000 of student loan and perhaps credit cards with balances. Most likely no one told you this is going to happen and most definitely no one told you how to deal with it!

As a recent grad myself I have seen the post-graduation depression many people fall into upon finishing school. So many of us have put the last 4-6 years of our lives studying and getting good grades. By the time the euphoria from the convocation is over, we stand there with a piece of paper stating we are educated, no experience, difficult economic times and a massive bill for that piece of paper in a form of a student loan.

The only way of finding a way out of this jungle is by educating yourself about the very basics of personal finance. No one teaches us about all these financial tools such as credit cards, loans, interest rates, repayments, penalties and oh wait….retirement!! Everyone talks about retirement planning before you even start to make any money. You feel pressured to start doing some kind of retirement planning at 25, but you can’t afford a financial advisor and all this seems so bloody overwhelming. People simply give up, because it’s too much, too complicated and they feel like they need a degree in finance to figure out their stuff.

Taking responsibility for your financial health is the first step to your freedom. The day you admit that your financial position depends on you rather than your parents, the economy, stock market or the government is the day you become an adult.

I will do my best to break down the complicated stuff such as saving, paying off debt, reaching goals, buying your first place, your first decent car and of course the retirement planning  that you need to be doing in your 20s and 30s, while you try to adult your way through it.