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!

The ugly truth about Government student loans

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A growing number of high-school graduates turn to government student loans to finance their post-secondary education. Adults returning to school full-time may also elect to do so. I was one of them. There is a number of reasons why:

–   parents haven’t been able to set aside enough money into an RESP

–   not enough personal savings

–    inability to obtain financing from a bank

But most importantly:

–   government student loans are fairly easy to obtain

–  no interest is paid by the borrower during the course of studies

After graduating, a number of people choose to remain at government level when it comes to repaying these loans:

–  repayment can be extended up to 10 years

– greater flexibility in payment amounts

–  repayment assistance in case of difficulties

– 6 month “grace period” after graduating when no payment is required

–  Interests paid on government student loans result in a tax credit

Unfortunately, many people don’t realize there is a very high price-tag to this convenience. The amount of interest paid on government loans will usually far exceed what you would pay at any financial institution for the same amount of money.

The current interest rates for a Federal Govt. student loan are as follow:

–  Fixed: prime -3%- + 5%, i.e. 8%…ouch!

– Floating: prime -3%- + 2.5%, i.e. 5.5%. If the prime rate goes up, so will the overall interest rate.

Let’s assume you have an $ 8 000 loan and choose the fixed-rate. You took advantage of the “grace period” and did not make any payment for 6 months. You also decide to stretch the repayment for the full 10 years. At the end of this period, the total amount repaid will be over $ 12 000 with more than $ 4 000 in interest!

You are not better off with the floating rate. Assuming it doesn’t change for 10 years -very unlikely!- the total amount repaid will be just under $ 11 000 with around $ 2 500 in interest.

The “grace period” is not really one. Interests start accumulating as soon as you are out of school. These are not eligible as a tax credit and they are added to your principal after 6 months. Yep, you will pay interest on interests!

Last but not least, government student loans cannot be included in a bankruptcy or consumer proposal, unless you have been out of school for at least 7 years.

The best course of action may be to try and consolidate all your student loans with a financial institution. If you can’t, aim to repay them within 5 years and do not use the “grace period”. In the first place, you need to make sure that you don’t take more debt than you can handle.