Category: Debt

Financial milestone: consumer-debt free!

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June 23rd, 2018 marked the day I officially became consumer-debt free.

I am not completely debt-free though. The only debt I have left is my mortgage. I am not too concerned about this one.

Being consumer-debt free feels pretty good so far, but it was not the big celebration I thought either.

I HAD BEEN UP AND DOWN THE DEBT ROLLER-COASTER

I started repaying my debt in late 2010. Back then, it was just a little over 20K, 12K being student loans. The rest was credit cards and line of credit debt.

At the same time, I was also building my emergency fund and modestly saving for retirement. I felt it was important to do so, given where I was in my life at the time.

Personal finances are just that…personal.

THEN CAME THE FIRST CONDO AND THE CAR

Fast forward to 2013, my debt level was steadily decreasing and my savings steadily increasing. My income was also good.

After careful considerations and calculations, I decided to become a homeowner.

The down-payment and closing costs put a serious dent in my savings, and because I moved to suburbia-where public transit was more limited- I bought a car, adding 16K to my overall debt.

But, I was able to handle all my obligations….thanks to my income and low interest rates.

THEN CAME THE SPECIAL ASSESSMENT

For those new to the blog, the first condo I bought was in a problematic building. Said building needed a lot of repairs and the corporation didn’t have any money to do them.

So, I found myself on the hook for another 6K of debt. I didn’t have enough savings back then. This happened 8 months after I bought the condo.

It was my lowest financial point. I felt like I would never get out of debt, never save enough money and would never able to do the things I wanted and live the life I had envisioned.

THE BEGINNING OF THE END

In 2016, I decided to sell my first condo. Although some major repairs had been completed, the building still had issues and I didn’t see myself constantly paying for levies.

Thanks to an over-heated market, I sold at over-asking.

The proceeds of the sale allowed me to buy my second condo and pay-off my “consolidated consolidation-loan”. I felt more elated paying this sucker off, than paying my car off.

I realize it is probably due to my suffering from debt fatigue, after 7.5 years of continous consumer-debt repayment. It is also perhaps because I don’t have anything to show for that consolidation loan, except my Diploma.

LOOKING BACK AND FORWARD

With more perspective and a better grasp of personal finances, I certainly could have proceeded differently. That being written, it is a little too late to think about how things could have been. The past has come and gone.

I actually don’t regret what happened to me financially-speaking. I really learned and grew during these challenges.

I know I won’t make the same mistakes again with my money. I may make other ones, however.

 

 

10 Financial killers

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In my previous post, I shared how F.I.R.E. has an element of privilege to it. I also indicated that for most people, F.I.R.E. will remain a pipe dream.

There are very real obstacles to becoming financially independent and potentially retiring early. Here they are, in my personal order of importance:

FINANCIAL KILLERS # 1 & 2: STAGNANT WAGES AND INFLATION

5 years ago, Statistics Canada published a very interesting study on the evolution of wages in Canada between 1981 and 2011. The study shows, among other things, that hourly wages barely bulged during that period. A full-time worker would earn about $ 21 in 1981 and just under $ 24 in 2011. Not even 15% more.

There were also gaps depending on gender, age and education.

In the meantime, inflation during the same period rose by 149.16%. 

FINANCIAL KILLERS # 3 & 4: DISAPPEARANCE OF JOB SECURITY AND PENSION PLANS

Job hopping is the new normal these days. Most people will have an average of 15 to 20 jobs and 2 to 3 different careers. Sadly said so, most employees are seen as disposables. Job security is a thing of the past, just like companies’ pension plans.

Only 37% of Canadian employees have a pension plan today, primarily in the public sector. It used to be over 50% in the seventies. A company pension plan used to be an important pillar of retirement, making-up for paltry CPP amounts and lack of personal savings. Nowadays, workers need to save more for their retirement. It can be an arduous task when looking at Financial killers # 1 & 2.

FINANCIAL KILLER # 5: POST-SECONDARY EDUCATION COSTS

Canadian students graduate with an average of $ 27 000 in student-loan debt. Depending on the degree and university, this amount can be much higher. Starting adult life and career with such burden is crippling, even more so when looking at the previous 4 financial killers.

FINANCIAL KILLER # 6: UNHEALTHY OBSESSION WITH HOME-OWNERSHIP

Yes, I am aware I am a home owner, thank you very much. That being said, I did not think about buying until I was in my mid-thirties, and after doing thorough calculations. Nothing says you have to buy a property right after graduation or after getting married!

In order to buy, you need to save for both a minimum down-payment and the closing costs. You also need to stay put for at least 5 years, if you want to gain equity and recover from the closing costs you paid.

FINANCIAL KILLER # 7: CAR AND COMMUTING COSTS

A subcompact car will cost on average $ 10 000 per year. This includes car payment, insurance, gas, maintenance and tolls. Since more people have to move to suburbia to find affordable housing and easily need 2 cars per household, these costs can only go higher.

FINANCIAL KILLER # 8: STAGGERING DAYCARE COSTS

If you chose to have children, it is very likely you will have to go back to work, despite the Federal government paid maternity leave and the Canada Child Benefit program.

This is not always a question of personal choice. It is merely based on at least the 5 first Financial killers.

A spot for an infant in a licensed daycare in Vancouver costs close to $ 1 300/month. For a toddler, you are looking at just over $ 1 000.  Prices in other big Canadian cities are similar, with the exception of Montreal. The Quebec government has its own childcare program and costs are way lower.

FINANCIAL KILLER # 9: CONSUMER-DEBT, AVOCADO TOASTS AND LATTES

A lot of people are still trying to keep-up with the Joneses, by constantly upgrading to bigger and shinier things.

That being said, a lot of people are also using credit cards to make ends meet, due to the above financial killers.

FINANCIAL KILLER # 10: LACK OF FINANCIAL LITERACY

Unfortunately, we are not taught at school that we need to save for retirement or for emergencies. We are also not taught how to best do these things. We are not taught how interests on credit cards or loans is calculated. We are not taught about management fees.

This doesn’t help, but it is not what sends someone to a trustee in bankruptcy, contrary to popular belief.

Financial milestone: consolidation loan fully paid-off!

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Yesterday, I made a lump-sum payment of a little over $ 8 000, effectively putting my consolidation loan to its final resting place.

Beyond the excitement of being finally rid of this loan, I felt a huge relief and also like a weight had been lifted off my shoulders.

until i saw the balance at zero, I hadn’t realized how much this loan was weighing me down

I initially took out this loan in 2011 to consolidate my student loans, a pretty much maxed-out line of credit and a couple of credit cards. At the time, the total amount was about $ 25 000, with almost half of it in student loans.

If you are wondering how I got to be $ 25 000 in debt, please read my story.

Fast forward to 2014, the loan was down to $ 13 000.00. Clearly, consolidating worked for me.

Unfortunately, I had bought a condo in a building that was not in great shape and I found myself faced with a special assessment of $ 6 000.00 for repairs.

Alas, I did not have that money saved. I had bought the property the year before, and my savings were at around $ 2 000.00. So, I went back to the bank and consolidated again.

I was back to being $ 19 000.00 in debt

It was crushing, and not just financially. I started suffering from debt fatigue. I felt like I would never get out of debt. This loan and the payment amount associated with it started becoming a permanent part of my identity.

then, i decided to fight back

After all, I had dug the financial hole I was in, and it was my responsibility to climb out of it.

I decided to throw in an extra $100 per month towards the “beast”, on top of the bi-weekly payments I had to make.

I had calculated I would pay off this loan 9 months ahead of schedule by doing this.

i lucked out with the sale of my condo

Yes, the very same condo that got me further into debt got me out of it. Ironic, I know. I sold the property last year, at over-asking price. Initially, I hadn’t planned on selling just yet. You can find the details here and here.

So why had this loan not been paid off earlier, you are probably wondering. Because I also had other competing priorities, like a lot of people.

I repaid the amount I had taken out of my savings for the deposit on the purchase of my second condo. Then, I bumped up my emergency fund, which was, for me, a necessity.

The lack of emergency fund is what got me into debt in the first place. I don’t want to be in that situation again.

My parents also came to visit me, and yes, I used some of the proceeds to enjoy my time with them. I don’t regret doing that for one bit!

Last but not least, I initially wanted to pay-off my car loan instead, as the amount was slightly lower and I would have owned my car outright.

I debated quite a bit and it took time to reach this decision. I am glad I did. The consolidation loan amount was for a longer period and a higher interest rate. I also had it for too long.

i saved $ 2 000.00 in interests

My bank periodically sent me information about my loan agreement. If I had let this loan run its full course, I would have paid an extra $ 2 000.00.

i now have more options, and it is freeing

It is really liberating not to have that bi-weekly payment above my head anymore. I am now on to tackling my car payment and increasing my retirement savings.

2018 will be the year of becoming debt-free!

Consumer proposal explained

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Please note I am not a Trustee in bankruptcy. This post is for information purpose only. 

There is an option to bankruptcy many people have never heard of: consumer proposal.

let’s start by defining a consumer proposal

A consumer proposal is a legal, binding agreement in which you agree to pay a portion of your unsecured debts; your creditors agree to forgive the balance.

This is very different from a bankruptcy, and there are definite advantages to choose a consumer proposal over the latter:

your assets are protected

Unlike a bankruptcy, your house, car and/or savings are not on the line. You can keep them.

you don’t have to make surplus payments

In a consumer proposal, your payment amount is fixed and for five years maximum. You don’t have to make any additional payment and you won’t forfeit your tax refund, if you receive one.

you are protected from your creditors

Your wages can no longer be garnished. Collection agencies can no longer harass you.

Here is how the process works:

a licensed trustee in insolvency works out a payment plan and presents it to your creditors

A consumer proposal is managed by a professional trustee. Payments will go through the trustee.

your creditors have 45 days to accept your proposal

No news means your proposal is accepted. Your creditors can also request a meeting to discuss further. Once the proposal is accepted, you have to adhere to all its conditions and attend two financial counselling sessions.

Most creditors accept consumer proposals. They know it is better for them than you declaring bankruptcy or not paying them.

a consumer proposal does impact your credit score & file

Although, it is “easier” than a bankruptcy, a consumer proposal has the same negative impact on your credit file. You also won’t be able to apply for credit until your proposal is completed. Your existing credit will be cancelled.

if you don’t meet the proposal’s requirements, you will be back to square one

That’s right, your proposal will be annulled and your creditors will come back after you for full payment of what you owe.

you need income to pay for the proposal

This is a mandatory requirement. Consumer proposals are also usually more expensive than a bankruptcy. You also need to pay the Trustee. These people do not work for free.

SECURED DEBT IS NOT INCLUDED

Your mortgage cannot be included in a consumer proposal, as well as any student loan less than 7 years old.

final word

A consumer proposal can definitely be a better option than bankruptcy. But before you decide to go with one, you should always try to pay your debts by yourself or obtain a consolidation loan.

 

Top reasons people get into debt

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When someone has debt, it is not necessarily due to ignorance and recklessness. Sure, this is one reason, but by no mean it is the only one.

Here are a few more:

  • Unemployment/underemployment: this is the fastest way to get into debt. For my first 4 years in Canada, I was consistently underemployed, i.e. underpaid, or unemployed, i.e. not paid. Since my earnings at the time did not allow me to save enough, I sometimes had to charge living expenses to my credit cards. Unfortunately, this is the norm for many recent grads and millennials.
  • Divorce: even with an “amicable” separation, between the legal fees, splitting of assets and going from duo to solo, you can be left way behind financially.
  • Sickness/disability: If you don’t have adequate insurance, any sickness or disability can wipe-up all your savings and leave you thousands of dollars in debt. It is important to have both extended health and long-term disability insurances in place. In Canada, the provincial healthcare plans do not pay for many items, such as medication. You can apply for sick benefits under E.I., but it won’t get you far.
  • Poor money management skills: I am always surprised when people don’t know how much they make, how much they spend or how much they owe. If you don’t know these very important details, you will spend more than you earn, guaranteed.
  • Drugs or gambling addiction
  • Identity theft: this can happen to anyone and is both costly and time-consuming for victims. You can take steps to protect yourself.
  • Little or no savings: Accidents, emergencies and shit do happen. If you don’t have an emergency fund, debt will be your only option.

No doubt there are plenty more reasons people are into debt, but these are very common.

Limitations of Peer-to-Peer lending

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Peer-to-Peer lending has recently made its entrance into the Canadian market. It has been touted as the best financial thing since sliced bread, but is it really?

Peer-to-Peer lending -P2P lending- is a form of financing, without the middle man, i.e. the bank. Individuals are lending their own money. In Canada, the 2 platforms are Grow and Borrowell.

I personally found  several limitations and disadvantages with this form of financing.

  • In Canada, the maximum you can borrow is 35K.
  • The interest rates are not that competitive. The best currently offered is 5.90%, the highest is about 18%, almost the same as a credit card.
  • In order to qualify for the best rate, you pretty much need a perfect credit score.
  • Monthly payments can be pretty high, even on a 5-year term and a modest amount borrowed. If you have other obligations, you may not afford the proposed payment.
  • You have to pay origination/processing fees
  • You may not received the full amount required, as P2P relies on individual investors. Such investors also may refuse to fund you based on the purpose of your loan.

P2P is definitely not for everyone and not everyone will qualify. You still need to convince lenders you are able to repay the loan. If you have a great credit score and no other debt, it may be an option.

That being said, check with your bank first. The interest rate may be lower and a line of credit may be the best solution, depending on what you want to do.

Debt will always be debt

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The most recent statistics indicate Canadians owe an astonishing $1.8 trillion in debt, including mortgages. For each dollar we earn, we owe $ 1.64. It is also estimated we save less than 5% of our income.

I personally find these numbers both staggering and scary. A lot of Canadians rely too much on their house as their main asset. Houses may not appreciate as much, and may not sell at the listed price.

In North America, people tend to rationalize and justify borrowing by splitting it in “good debt” and “bad debt”. A house, a car, a student loan are considered “good debt” since they bring assets or a higher earning potential. On the other hand, gadgets or vacation charged to a credit card are considered “bad debt” since it is perceived it does not make any real difference in our lives.

Unfortunately, it is not that simple. A car is a depreciating asset. It looses half of its value within 5 years. If the field of your degree or diploma does not have a high employment prospect, you won’t make more money.

As shocking as it may sounds to you, you do not have to get into debt for a car or a degree. 

Granted, for a house, you will most likely have to go down the mortgage road. But because you qualify for a 400K mortgage does not mean you can afford a 400K property. You also need to look at the amount of interests you will pay over the course of your mortgage.

Instead of talking about “good debt” and “bad debt”, we should talk about “manageable debt”.

A manageable debt is one that can be paid within 5 years -excluding mortgage-, that has a reasonable interest rate and that does not impede the ability to save for emergencies or retirement. I would also add, that, should you loose your job, you should still be able to make the monthly payment. The purpose of the debt then becomes totally irrelevant.

If your debt does not fit the above definition, then it is a ticking time-bomb!

In the end, debt will always be debt and you will always have to pay it off, no matter what. It will always cost you money. There is no such thing as “good debt” or “bad debt”, it is only debt!

 

 

Other financial mistakes I made

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As previously mentioned here and here, I made plenty of financial mistakes in the past. I see them as a learning experience. I wouldn’t be where I am today, if I hadn’t made these mistakes. I can’t say for sure that I would be in a better situation either.

To be honest, I made a few more mistakes:

  • Not negotiating my salary or asking for a raise: This is a bit of a cultural trait. In France, where unemployment is very high, it is not the norm to ask for more money. If you do, you are usually turned down, and it is not well-perceived. It took me a long time to feel comfortable asking for more, but I left thousands of dollars behind.
  • Not investing sooner. My first experience with investing was so dreadful it resulted in me not investing my money for a few years. I let fear rule me, instead of educating myself. I also left growth opportunities behind.
  • Banking on money I didn’t have. Back in 2008-2009, I was self-employed as a sole proprietorship. In terms of Canada Pension Plan (CPP) contributions, it meant I had to pay double. When I filed my tax return, I thought I would receive a refund and I had made plans for it. To my huge surprise, I actually owed $ 1 200, because of the CPP amount. Tax refund, bonus, raise, lottery winnings….don’t bank on them until you actually have them!

What about you? What financial mistakes have you made?

Home-buyer plan explained

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Note: as of January 2019, people can now withdraw up to $ 35 000 under the program. 

If you are trying to buy your first home and have difficulties coming-up with required down payment, the Canada Home-buyer plan or HBP might help you.

The HBP allows you to withdraw up to $ 25 000 from your RRSP, tax free. You can withdraw this sum, provided it is available. If you buy with a spouse or a partner, you can withdraw up to $ 50 000.

You need to buy a “qualifying home”, i.e. a home you will use as your primary residence. Rental properties do not qualify. You need to have a written purchase agreement.

You also need to withdraw the money maximum 30 days before possession. You won’t qualify for the HBP after possession date.

Last but not least, you need to be a resident of Canada.

Canada Revenue Agency considers the HBP a loan. Although you won’t pay any interest, you will still need to repay what you withdrew within 15 years. The repayment starts the second year after the purchase. CRA will indicate the amount you need to pay on your Notice of Assessment.

If you don’t make the required payment, the amount will be considered taxable. You will always have to repay this loan, even if you file for bankruptcy or consumer proposal.

Using the HBP has both pros and cons.

Pros:

  • Tax and interest free withdrawal
  • 15 years to repay and no penalty if you repay before
  • Allow you to become a home-owner sooner

Cons:

  • borrow against future needs (retirement)
  • lost interest & capital gains
  • must repay the loan “no matter what”

I used the HBP when I bought my condo 2 years ago. I withdrew $ 7 000. I don’t regret my decision.

I have already put 2/3 of this money back and will put the remaining portion back within the next 6 months. And most importantly, I was able to become a home-owner.

What not to do during your mortgage application

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You got pre-approved for a mortgage, you found your dream home and put in an offer. While you are doing your own due diligence on your future home, your lender is doing the same on your initial application.

It comes as a surprise to many people, but a mortgage pre-approval is not a final approval.

A pre-approval is a maximum amount and interest rate a lender agrees to for a certain period of time. It is based on a basic assessment of your income, debt, credit score and proposed down payment. It gives home-buyers an idea of what they can afford and what their mortgage payment will be.

Once you have made an offer, the lender will do a more thorough and detailed check of your application and the property you want to buy. As long as you haven’t signed the mortgage documents, do not:

  • change jobs or become self-employed: lenders are looking for your ability to repay the biggest loan ever made to you. Stability in both employment and income is key. Most lenders want you to have been in your current position for as long as possible, and out of probation period. A change in your income also means a change in the amount you qualify for. If you become self-employed, it is unlikely that you will qualify for your mortgage anymore, as the criteria are very different.
  • Open new credit accounts: whether it is a new credit card, a line of credit or car loan, hold off for the time being. It is very likely your lender will do another credit check to have your most recent information. New credit inquiries impact your credit score and your debt to income ratio. A car payment may mean you don’t qualify for the same amount anymore.
  • Close old credit accounts: this actually has the same effect as the above.
  • Make large deposits or withdrawals from your bank accounts: most lenders check that your down payment and closing costs are covered by your own money.  If a large deposit suddenly appears in your account, it could be interpreted as being a gift or a loan, triggering additional questions and paperwork.

Obtaining a mortgage is definitely not as easy as it seems. Actually, the Government of Canada has made it more difficult over the last 5 years. Don’t let a foolish mistake derail your dream of home ownership.