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.

Debt will always be debt

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!

 

 

The tale of the Christmas dress or how I got into debt

My first job in Canada was as a receptionist in a private high-school in North Vancouver. The job in itself was boring with a pay to match, $ 12 per hour. I worked there for 6 months.

The environment, however, was new and interesting. I had never worked in an academic setting before and my co-workers were nice.

My employer also had a Christmas party, which was also new to me. Christmas parties are typical of English-speaking countries. In France, companies usually offer a Christmas lunch, if they actually do anything for the occasion.

In late November, all staff was officially invited to the school’s Christmas party. The dressing code was semi-formal. Unfortunately, I had nothing in my wardrobe for this kind of occasion.

My first though and instinct was to decline the invitation. Looking back, I should have trusted my gut feeling, telling me it wasn’t worth it. The party ended up being as boring as my job, and I left the company 3 weeks later.

But, I let guilt crept-in and also the concern of  what people would think. So, I went shopping. As indicated, I was making $ 12 an hour, about $ 1 700/month. My rent back then was $ 790. Needless to say money was tight, and I didn’t have any savings.

Luckily, my then bank had granted me a credit card! I ended-up buying a very nice Christmas dress for $ 250. To date, it is the most I ever spent on a single piece of clothing.

I charged the full amount to my credit card  without thinking about how I would pay it back. When the credit card statement came, I didn’t have the money to pay for it. So, I only made a partial payment.

And this was the beginning of my debt story. Right there. When I decided to spend more than I could afford and be in denial about it.

I realized I did this out of fear. Fear of not fitting-in, fear of what people would think.

Fight Club is one of my favorite movie, for many reasons. It is full of quotes against materialism and consumerism. One particularly resonated with me: ” the things you own end-up owning you“. So true!

The saddest part is that I only wore that dress at this party. I never wore it again afterwards. I donated it to charity a few years later, but it took me some time to pay for it, interests included.

After making a few more mistakes, I finally learned not to care about what other people think and also to trust my instinct more.

What about you? How did you get into debt in the first place?

 

 

Financial set-backs and debt fatigue

I have been hit in the pocketbook a couple of times recently, just when I thought I finally had my debt under control.

Three months ago, our strata had a special general meeting to review the condition of our building envelope. Some repairs are definitely necessary. The -heated- debate was on how much owners should be paying. We had the “choice” between $ 5 000 and $ 10 000 per unit. “Luckily”, $ 5 000 was chosen.

Nevertheless, I do not have that money on hand, as I am still paying off around 12K of debt.

Then, in September, I got involved in a minor car collision for which I was found 100% at fault. In British Columbia, the Provincial Government administers vehicle insurance and the premiums are pretty hefty, as there is no competition.

To protect my premium and driver’s record, I was given the option to pay for all repairs on the 2 cars. Otherwise, I will face a $ 5 000 increase in my premium over the next three years. I haven’t been communicated the total cost of the repairs yet, but either way I have to pay!

The measly $ 2 000 I have in my emergency fund are just not going to cut it….If I had been able to put the amount allocated to my debt repayment over the last 3 years into a savings account, I would be more than able to pay for both.

I definitely feel trapped by my debt right now. I have also been suffering from debt fatigue. It feels endless and like I will never get out of it.

I also realized my debt is preventing me from doing many other things now, such as renovating my condo, taking classes and traveling.

Lately, I have been considering a change of career. It would take me back to self-employment but might also mean a pay-cut, at least at the beginning. It would also require me to take classes.

The issue is that paying for my bills and servicing my debt both require a solid paycheque. I simply don’t have enough savings to make-up for a pay-cut, or for no pay.

I will have to proceed step-by-step with my goals and it will probably take me more time to reach some of them.

Should you use a credit counselling service?

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Let’s start by defining what “credit counselling” is. It is a process that involves offering education to consumers about how to avoid incurring debt and helping debt repayment by establishing an effective debt management plan and budget.

Written like this, it might sound interesting and appealing, particularly if you are in a difficult financial situation. Unfortunately, the majority of credit counselling agencies do not have your best interest at heart, including the ones claiming to be “not-for-profit”.

The main goal of these services is to set you up on their “in-house debt repayment plan”….and cashing-in on your dollars. With a debt repayment plan, the service will contact your creditors on your behalf, and either offer a lump-sum payment on your debt, or arrange for a monthly payment for a number of years.

This is never done for free, including at so-called not-for-profit societies. Did you know these organizations receive the majority of their funding from banks, credit card companies and other financial institutions? And where do you think this money is coming from? Yep, you got it…. from you!

Some agencies can receive up to 50 cents on every dollar they collect on behalf of your creditors. On top of this, they will charge you a monthly administration fee, to cover for their overhead costs. People working there are not volunteers, they are employees.

Back in 2008, when my own financial situation was getting desperate, I went to see one of these agencies. Of course, the “debt repayment plan” was the only way to go, even if it was not adapted to my problem at the time. The proposed monthly payment was too high compared to my then income. It also included a $40 administration fee I disagreed with.

I never signed-up for it, despite several follow-up calls from the company. I am glad I didn’t, as it would have trashed my credit score and put me in a worse situation, financially speaking. Credit bureaus treat debt repayment plans the same way as a consumer proposal or a bankruptcy. It will stay on your file for at least 6 years.

If I had done this, I would have probably never been able to buy my condo. I don’t think highly of this kind of services. Credit counselling agencies are nothing more than collection agencies, minus the harassing part.

If your financial situation is getting to this point, you are better off meeting with a Trustee in Bankruptcy to review your options. Because you are going to see a Trustee doesn’t mean you have to file for bankruptcy. Bankruptcy is definitely not the only way  to get out of debt