To all readers of FindependenceDay.com, we wish a very happy — and Findependent! –2016.
A reminder that as of January 1st, 2016, you can contribute a further $5,500 to your Tax-free Savings Account or TFSA. That’s the first thing they remind you of at RBC Direct Investing, one of the main two financial institutions our family uses.
I have to admit that personally I’ve made no formal list of New Year’s Resolutions, although I have declared that I’d like to take my stress levels down a tad, perhaps by using the word “No” a little more often. We’ll see.
In the meantime, for a good formal list of financial New Year’s Resolutions, the Financial Post’s Angela Hickman recently published a good starting point. Click on Five financial resolutions for 2016, and how to (really) make them happen.
Below, I’ve taken the liberty of summarizing the 5 points. Again, click the red link above for the full piece.
1.) I resolve to figure out my finances
2. I resolve to stick to a budget
3. ) I resolve to get out of debt
4.) I resolve to save more
5.) I resolve to stop wasting money
These are all valid suggestions and especially useful for younger folks for whom financial independence is still a faraway goal.
7 eternal truths can also become New Year’s Resolutions
Eternal Truth No. 1 is Live below Your Means.
The online link is here.
Note there is also a short video accompanying the online article, and a growing number of comments below the piece.
Here is a preamble I wrote for it:
Series Rationale: One of the most experienced personal finance writers in North America is the Wall Street Journal’s Jason Zweig. As he wrote here after writing his 250th Intelligent Investor column, he confessed that there are only a handful of personal finance stories out there:
“I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself. That’s because good advice rarely changes, while markets change constantly.”
In this seven-part series, I look back on my two decades plus of writing about money to distill it all down to these “seven eternal truths.”
As far as I know, the second instalment will run next Wednesday and subsequent Wednesdays over the summer.
Here’s my latest MoneySense blog, which looks at what I perceive to be a developing problem in the abuse of credit cards by a few Millennials with whom I am acquainted. I name no names but the guilty know who they are! More’s the pity, because the book Findependence Day starts with an opening scene built around a young couple’s similar credit-card problem!
For one-stop shopping purposes and convenience, here’s the original version:
With some reluctance, I feel compelled to return to the age-old topic of excessive credit-card debt. I do so because lately I’ve had chats with some of my nephews and nieces, all in the age range of 23 to 24. These kids have now all graduated from university or community college, have made a first stab at being in the workforce, and have already racked up what I consider to be excessive credit-card debt.
In one case, this is combined with a hefty student loan. The (single) parent in question may not be loaded but I was nevertheless surprised by the extent of the debt. Same with the young person on the other side of the family, where the parents are doing quite well financially. When I learned he had this debt and was paying only the minimum monthly amount, you can imagine the discussion that ensued.
In fact, I dug into the personal archives to confess that when I was their age (well, late 20s), I too was that close to insolvency. Unlike the situation today, when I was freelance in the 1980s I was single, rented an apartment and had no financial assets to speak of. My debts were minimal but I did tend to run a credit-card balance of $500 or $1,000 and until I woke from my stupor, did as my nephew is now doing and paid just the monthly minimum.
My own credit-card epiphany
As I related to my young relative, part of the reason for my indebtedness back then was that I was in the habit of buying Compact Discs, which then ran at about $20 each. My credit-card epiphany was when I realized that in a typical month, I was paying $40 in interest payments. One day I thought to myself, “My goodness. I could be buying two CDs every month with that money!” So I stopped buying them for awhile (I may even have done what I do today, and frequented a library) and whittled the balance down to zero. At that point, I reasoned, I was free to pay $40 a month in cash to buy two CDs.
And I think that’s the way young people should approach this problem. Think of a good or service you value, then imagine it going down the drain to the credit-card company just because of your poor spending and debt repayment discipline. For example, my nephew is a big hockey fan: perhaps visualizing the purchase price of a junior hockey game going up in smoke each month might be enough to get him to change his ways.
One way around the problem
On his Boomer & Echo blog, fee-only financial planner Robb Engen once described his personal strategy for getting out from under the burden of credit-card debt. He was tackling the question of whether to pay off the balance in full the moment each expense is incurred, or waiting until the end of the 21-30 day grace period that amounts to an interest-free loan. As he relates, the risk of maximizing the grace period is that sometimes you miscalculate and end up paying out interest you hadn’t reckoned on paying.
But the point remains. The credit-card companies love it if you leave balances unpaid and choose to do what my nephew did and pay just the minimum monthly amount. With interest rates still near 20%, that way lies madness: most card statements should say somewhere just how long it will take to pay off a debt if all you do is pay the minimum. It’s several years in most cases, and you’d be shocked to find out just how much interest you’re shelling out with this strategy (and I use that term loosely!).
Far better to be on the receiving end of interest, either by collecting interest on GICs or fixed-income investments like bonds, or better yet, by owning the shares of big U.S. credit-card giants like Visa or Mastercharge. Early buyers of either stock have made out like bandits, which is exactly what they are: bandits!
Don’t let them hold you up!
Conventionally, the American dream refers to a well-paid job, a family of two or three children and a new home along with a sturdy retirement nest egg. However, the impact of the economic meltdown as well as over trillion dollar student loan debt has left many to reconsider that dream. They are now introspecting a lot about the reasons for their own financial plight. Moreover, they are looking for ways to resolve the issues that plague their financial independence or “findependence.”
A new survey by Credit.com and GfK Custom Research found 25% of respondents defined their version of the American dream as being able to lead a debt-free life. Such a response comes second only to the definition of becoming financially stable by the time one reaches the age of 65.
This answer came mostly from the group who belong to the retirement age of 65 or above. In addition, 18% of the survey participants have responded that they dream to buy a house of their own, while 7% want to opt for higher studies and pay off their education loans.
Despite the continuous grim economic outlook, people are positive regarding their ability to fulfill their customized American dream. Another survey by Credit.com has revealed that 54% have a belief they are about to fulfill their dream, while another 24% declared they have already attained it. This summed up to a total of 78% who were affirmative about their retirement prospects.
The advantages of being findependent
Post the the Great Recession of 2008, Americans have chosen a path that is not wrought with underwater-mortgages, overwhelming credit card balances, tedious car loans and multiple lines of student loans.
Instead, their new road leads them to a life that is debt-free – where they’re no longer burdened with an exhausting budget, a dreadful mailbox and life that’s controlled by the debt collectors and spiralling interest rates.
There are numerous benefits to living debt-free that would entice anyone living on the edge of bankruptcy to start following a debt management strategy to get rid of his or her financial woes. Some are as follows:
Reduced interest charges – CreditCards.com has said that, on an average, rate of interest on credit cards is 14.95%. The average credit card debt for the consumer carrying a balance is almost $5,000. So, a lot of interest is paid by people that is also weighing down their monthly budgets. However, these are just the averages. For people with bad credit histories, the rate of interest could be several notches higher. Hence, being debt-free allows you to steer clear of wasting your hard-earned money on interests that would leave little tangible benefit for you to use at a later stage.
Increased retirement fund – According to a combined statistical data compiled by the Federal Reserve, the U.S Census Bureau and the Internal Revenue Service (IRS) of 2012, 25% of American households do not have any savings whatsoever. What’s more surprising is the average retirement fund is only $35,000. Indeed, avoiding sky-high interest debts could leave these people with more disposable income. It isn’t difficult to understand there are numerous ways to dodge long-term debt.
More, they could even find out the ways to direct their income as well as increase their savings at the end of it all. The bottom line is the absence of monthly bills with exorbitant interest lets you save all the more aggressively for retirement, home purchase, college and even build up an emergency fund.
Finally, that one benefit sought by everyone is complete solace and peace of mind. Hence, being debt free and attaining financial independence would translate into a life with less worries. These are a few of the advantages of findependence that you cannot support with a survey report or reflect through statistics.
This blog was written by Zindaida Grace, a financial writer and researcher associated with the Oak View Law Group.
Here’s the second of three installments of a video interview I did with BrighterLife.ca’s Kevin Press. It’s about three minutes and focuses on the theme of “guerrilla frugality” from the book, Findependence Day.
Click here to view.
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