Tag Archives: Youth Finance

Bitcoins Intrigue Me

I find the growth of mainstream awareness of Bitcoins amazing. To be perfectly honest, I didn’t quite know what they were until the mainstream media starting reporting on them, and even then if I hadn’t done some of my own research would not have fully understood. If you’re in this group you can find out more on the Bitcoin official website and (even more helpful) Wikipedia page.

For those of you who trust me, a Bitcoin (BTC) is a boarder-less “crypto-currency” which first came into use in 2009. The concept is that there is no government backing the currency and it can be used from country to country without need for exchange. The control of the currency is all electronic, from management to transactions, and it’s release into use is scheduled from now until 2140, when it reaches the maximum of 21 million BTC.

Recently there have been some major Bitcoin developments: a man in Alberta is attempting to sell his house for Bitcoins, which is the largest “real world” transaction to date. Secondly, a Bitcoin ATM has been created, which is one step closer to making the currency something the majority could consider using, expanding it beyond it’s current internet sub-culture.

Now that I have, hopefully, provided enough evidence that this is a real thing and I’m not crazy, what does this all mean? As I’m sure you can imagine, with the increase in mainstream awareness, critics have been coming out of the woodwork. Every talking head on TV now has an opinion about them, and I’m sad to say that there are very few that are positive, or even thinking clearly.

To me, this type of monetary policy is actually a step in the right direction. To get to my reason why, I need to first explain a few of the criticisms and why I don’t think they’re valid:

It is not backed by any government.

So what? If the last 6 years have taught us anything is that money backed by a government can be worthless as well. Not only that, but when there is a government involved there are all types of lies and cover-ups to deal with. Along with competing priorities and human error.

It is primarily electronic.

Again, so what? The large majority of our current transactions are electronic, as well. When do you really use cash? With the use of cheques, debit and credit cards, along with the growing popularity of online shopping, people don’t have to see cash for years at a time if they really don’t want to. If you think that the government is printing all of the money they are releasing into the economy, give your head a shake.

It has no underlying value and relies on a group of users believing it is worth something.

… which is the exact same as our currency. Only difference is that there is a larger group of people who believe in it and a government who is telling us it’s all going to be ok. Ever since our currency was debased, it is just a made up system of numbers that rely on the users to believe it is worth something. In terms of “underlying value” it is not worth more than the paper it is printed on. At least with the Bitcoin there is no false confidence.

Why the Bitcoin interests me.

To me this is democratic currency. It is made by the people and it’s value is based on how it is adopted. The other interesting thing is that it is predictable, in a sense. We know how it is being released over the next 130 years, which is way more than could be said for government-run currency. All of the points raised by critics are nothing different from how world currency is being managed right now.

There is a large amount of volatility right now, so proceed with caution, but I think that once it has wider adoption some interesting things are going to happen.

Mortgage Overview

A house is likely the largest purchase you will make in your life. It is a significant decision, not only because it will likely be for hundreds of thousands of dollars, but also because it is a high-emotion decision. You will be living there for many years; therefore it is important to love it.

Likely you will not be buying your home in cash, therefore a mortgage is a vital part of the purchase process. It is also likely that you don’t know much about mortgages and the explanations you are getting aren’t being too helpful. At the very least, you should really know why you can “afford” what the bank tells you you can.

The bank determines what you can afford based on your income and debt payment obligations (including the new mortgage), calculated as your Total Debt Servicing Ratio (TDSR). The lower the TDSR, the greater the mortgage amount a borrower will be approved for.

TDSR is calculated as {[loan payments] + [available credit maximum payment] + [new mortgage payment]} / [monthly income]. This sounds complicated, but an example will help explain.

Let’s assume you may have the following finances:

Car loan ­payment – $350/month
Line of credit – $0 balance and $5,000 available
Credit card1 – $500 balance and $1,000 available
Income – $3,000/month (before tax)

Your monthly debt obligation will be calculated as the following:

$350 + ($5,000*0.03) + ($1,000*0.03) = $530

Now taking that amount and determining the TDSR:

$530 / $3,000 = 17%

This means that if you take advantage of all debt available, the minimum repayment amount would take up %17 of your pre-tax income.

You may be thinking “But that doesn’t even include my mortgage,” and you would be right. The above example is still important for the following reasons:

  1. You learn how TDSR is calculated.
  2. You learn what that means in terms of real dollar amount paid per month.

These two points go a long way to show how the banks aren’t looking out for your best interest when calculating a mortgage. Here’s why:

  • In calculating the TDSR we (and the banks) use the pre-tax income. That means we haven’t yet accounted for the 25%+ that the government will take off our pay that we never see (taxes, CPP, OAS, erc.).
  • Any credit that is available to you, usually in the form of credit cards, is calculated into the formula. The key take-away from this is not to blindly accept limit increases from your cards, because it could come back to haunt you. If you don’t need the room, don’t take it!
  • When looking at the TDSR in the example above (17%) it doesn’t sound like a lot, but the real dollar amount paid per month ($530) is fairly substantial.

I make the point about 17% still equating to a fairly large payment, because most mortgage issues will allow borrowers to have a TDSR of 35 – 40%, even up to 45%, including the new mortgage payment.

While those numbers are great news for those who are looking to buy a house, especially younger people with lower incomes; you really must consider what it means to your lifestyle. Paying $1000+ in loans, not factoring in other bills associated with a house (water, heat, cable, insurance) can eat into your income rather quickly. Although owning a house is great, but so is being able to have fun in your 20s, so choose wisely.

The final amount you get approved for has a few factors, but can be simplified to [TDSR] + [down payment]. While a higher down payment can allow you to afford a more expensive house, only to the amount that the down payment is increased. Conversely, reducing current debt payments or increasing income have a greater impact than putting more money down.

I suggest going to online and playing with RBC’s mortgage calculators. Spending some time on this will teach you more than I can ever hope to. Also, if you find any mistakes, let me know!

Start Saving When You’re Young

Working full time in the “real” world when you’re young is exciting. In addition to contributing, learning, getting your life on track, etc. it’s awesome to finally have some real spending money that you can start establishing your life with. While after living more-or-less your entire life on limited funds / someone else’s (your parents) dollar, it is good to be able o support yourself and do some of the things you want with that money.

While it’s great to have freedom, and it’s definitely important to experience life, the unfortunate reality is that it is also a good time to be saving for your retirement. I don’t mean other long term goals like buying a house or whatever, but your retirement. The fact of the matter is, even if you can’t save much, even if it seems forever away, and even if it’s the most boring thing you can do with your money, it is hugely to your advantage.

You can find endless articles and worksheets that show you how compounding is your friend and it really is. I’m not going to go into it, because it has been thoroughly explored better than I would be able to explain.  Even Einstein thought the principle of compounding was the most powerful force in the Universe.

While the percentage you can earn on your money because of the extended timeline is awesome, there is a more important reason to start young is because you most likely have far fewer obligations. Don’t get stuck in the trap of assuming you will start saving when you’re older, when you are making more, when retirement is closer. All of those things will happen, but at that time your lifestyle will likely be growing along with your paycheque.

Bigger mortgages, families, more refined tastes, along will many other factors will eat into your budget, and if you haven’t established a good base of saving, then it’s unlikely you’ll make up ground. It’s even better to save while you’re younger, stop for a few years in your 30s and start up again then it is to wait until you’re in your 30s.

Don’t fall into the trap of worrying about it tomorrow or thinking you don’t make enough. Everything starts somewhere and you can’t keep pushing it until tomorrow forever. You don’t want to be in a bad situation before you start saving.

Another important side point is that when you’re young you also have time to take a few risks and make some mistakes with your money. You have your whole life to make up for it. It’s far better to take some calculated risks for higher rewards when you know you can recover, rather than making a gamble when you’re older because you think you have to in order to retire.

Moonlighting

I realize that there are (and will continue to be) posts where I’m waving my finger, talking about how people should live within their means. While this may be true, I know I’m violating a rule that I try to always hold myself and others to, which is if you are making a criticism, at least make it constructive.

The obvious answer to living within your means is to keep a leash on your spending, which is all good and fine for some. If you’re anything like me, however, rather than conceding to giving up on doing things that would make you happy, I prefer to think of creative ways of working around the issue. One answer to this is moonlighting.

Before some of you start getting defensive. This doesn’t mean going to get a job in a mall, nor does it mean working the night shift at a factory (not that there’s anything wrong with either of these). There are almost endless ways to make some more scratch and it needs to fit into your life in a comfortable way. Don’t feel shame, though. People from all walks of life choose to do a little work on the side, from physical labour, to doctors, to tutors, to accountants. The list goes on and the only thing that these people have in common is the fact they want to make more money.

For some of us, moonlighting is likely something we’ve considered once or twice in the past, in some shape or form. It could be in the form of a part-time job, doing some contract work in your field, starting a business, or doing something even more creative. Whichever path is best for you really depends on multiple factors and the decision won’t be the same for everyone. There are a few things that should probably be considered.

  1. Will it work around / be allowed by your current employment? In terms of schedule, as well as your employer being OK with the type of work. I recommend being open and honest about it, because regardless of the upside, losing your full-time gig because of something on the side isn’t worth it. Also, violating your employment contract is rarely advisable.
  2. What impact will it have on you and your life? If you love going to the cabin every weekend, getting a job that keeps you in town may solve the money problem, but I’m guessing will leave you unhappy before long. Similarly, if you feel like something is “below you,” that mindset doesn’t usually vanish and you’ll continue to be miserable.
  3. Can you actually do the work and are people willing to pay you? Deciding one day to be a “management consultant” sounds very impressive, but do you have the experience and expertise to back it up? There is no point in marketing yourself as a high-level guru if you can’t walk the walk, because people will eventually realize you have no clue what you’re talking about. Better to not give them the chance and stick with what you know.

Besides giving your financial freedom, moonlighting may give you the opportunity to expand your skill set and learn something new. If you have an area of interest and can find something related to it, all the better. My tired example is that I wanted to have a small side business and started it up, which is now making me some money. I wanted to get better at writing, so I started this blog. I’m not making anything off of it (yet), but don’t know what the future has in store.

Taking it a step further, if you have a hobby that you are spending time on anyway, it may be interesting to see if anyone will pay you to do that. For example if you enjoy painting on the weekends, why not try and sell a few? You can set up a website, post them on Kijiji or go to a craft fair. This way your work doesn’t even feel like work. The obvious downside is you may not end up feeling great about your work if nothing sells, but if you are OK with that possibility there’s no harm!

All in all, I’m just here to say that there is no harm in looking into your options and this is a better choice than spending above your means. While it may not be the sexiest choice, doing it now while you’re young is still a much better option than being forced to do it at an older age. Really, when it comes down to it, who out of us honestly has no free time to spare?

Stop Playing Catchup With Debt

This is going to sound very “fuddy-duddy” of me, but I think at some point in the last half-century, western society became much to comfortable with going into debt. I heard from a young age, and it’s always stuck with me, how the only acceptable reason to go into debt is for your house. While I would add a few reasons on there (education and starting a business), it’s something that I have always tried to remember.

Though my early learning about money was to be very conservative, and I admit when I was out making my own I rebelled a little bit, that original lesson about debt stuck with me. When I would be getting short on funds and the temptation struck to just throw it on my credit card, the old lesson usually stopped me.

Deconstructing debt into it’s most basic form, it’s paying for the opportunity to borrow money that isn’t yours. Doesn’t matter if it’s a bank, credit payday loan, credit card company or loan shark, it’s all the same. It essentially solves a short term problem, but has long term consequences that are usually not considered at the time. This is because we either can’t or won’t understand the decision process for borrowing money to purchase something.

To me, the biggest misconception about the majority of purchases that are done using debt is that they are analytical in nature. We rationalize to ourselves the reason we are going into debt makes the most sense out of our options and prove using logic that we are “able to handle it” because we know we will make enough to cover payments. While this is all good and fine, I would argue that in a large majority of times we choose to go into debt, it is an emotional decision.

It is this emotion that pushes us to take the short term satisfaction and ignores what it means in the longer term. We look at this one transaction and how it will make us feel, rather than how it will affect our lives for months or years to come. It is for this reason that once we start, being it debt becomes a pattern that is difficult to break.

How it works is that you borrow once to make a purchase. The happiness that this purchase gives you does not last as long as it takes to pay it off, therefore you are stuck in debt and no longer as happy. Then, before you are able to get out of debt and save money, you see another item which will make you temporarily happy, borrowing more to purchase it. All the while paying interest on the amount that you borrow, which reduces your overall spending power, i.e. how much stuff you can buy.

Ironically you are able to do and buy more if you stay out of debt and avoiding interest costs. It may be a sacrifice, but saving the money first, even if it’s small amount, not only allows you to be in control of your budget, but also gives you more of a sense of satisfaction when you are able to make the purchase. Knowing that you don’t have to worry about any consequences, along with the added sense of anticipation (which I believe is often better than the payoff) you are able to enjoy the decisions you make with your money more.

As a final thought, I know there are other extreme circumstances that there is no way to avoid debt. I know that if I were to get ill tomorrow with something that needed to be dealt with and my insurance wouldn’t cover it, I would not think twice about borrowing as much as I can to help myself. Just consider where I would be, however, if I had already borrowed all that I can to make unnecessary purchases. The peace of mind knowing that I can take care of myself is worth any purchase I can make now.

RRSPs Still Strong For Young People

This time of year there is a lot a talk about RRSPs. If your parents were anything like mine, they wanted you to contribute as much as possible in order to save for retirement. It was introduced while they were still children, or not even born yet, and they have been the beneficiary of an entire lifetime of being told how powerful it is for retirement planning.

Recently, though, especially since the introduction of the TFSA, there has been some backlash about the RRSP as an investment for young people. The general premise is that if you are in a lower tax bracket now than you will be when you retire, the much-acclaimed tax deferral is not worth it. This is because you will end up paying more in taxes when you withdraw the money than you deferred when you deposited it. Not only that, but you are paying taxes on the income you make on the investment.

The popularity of the TFSA for young people is because any interest / investment income earned is withdrawn tax-free. This is traded for the fact your TFSA funds are contributed with after-tax dollars (i.e. no deferral). It does make sense for people in a lower tax bracket, and is a powerful savings tool. However, I don’t think the RRSP should be getting hit as hard as it has been.

There are a few advantages to the RRSP that help people save. I have a few quick ones to go over, then a longer one. First the quick:

  •  For some (at times me included) it is a little too easy to withdraw from your TFSA. An RRSP has you paying taxes on what you take out, which makes you think it over a bit more than a TFSA withdrawl which can be withdrawn online.
  • RRSP automation (with is available for TFSA’s as well) is a way to save without thinking about it. You can learn to live with a little less.
  • There’s the whole downpayment on your first house thing (Home Buyers’ Plan), but I’m not sold on that one fully.
  • You don’t pay taxes on gains in the year you receive them. You can then pull it around and plan what you end up paying.

The big one for me, though, is the fact that you get the tax refund now! Getting money today, rather than waiting for some unspecified time in the future when you will be making more, is the equalizer in my mind. The only thing is that it depends on how you use that money.

If you are smart and use it to either pay down debt or save for retirement, it is no longer some straight line comparison of “I’m getting a x% benefit, but will be paying y% in the future.” The money you get back will be compounded, either as an investment or a reduction in interest payments. The really smart thing to do is use that return to invest in your RRSP, compounding the tax benefits you receive. The one thing that all financial planners seem to agree on is that when you’re young, compounding is your best friend.

Now, the final disclaimer is that I have no clue if RRSPs are 100% the best plan for you. It depends on so many variables, many of which have to do with personal habits and even more of them unknowns. I can’t see into the future, so make the decision for yourself, use a financial planner, a parent or friend. There are some online calculators that you may find helpful, just Google it.

End note: If you want to try playing the game of getting the most refund from your RRSP, rather than stockpiling cash for years (and having the constant temptation to spend it) you can always contribute to your RRSP, then defer the deduction. This way you are still saving for retirement, but trying to get the full benefit of the refund you receive.

Budgeting

I’ve been told by certain people (not naming any names) that I’m a little obsessed with budgeting. Admittedly, it’s not “normal” to be tracking your spending on a spreadsheet from your phone, as you leave the store and walk to the car, but what can you do? We all have our obsessions and this is one of mine.

I maintain that at least my compulsion is a hyper-productive one. A habit that allows me to stay one step ahead of myself, and have comfort in the decisions I do make with my money. I think that this is something that young people tend to discount.

Unless you have more money than you can possibly spend (lucky you) or so little that you don’t have the luxury of making choices as to what to buy (sorry to hear it), it seems from my non-scientific observation that budgeting isn’t a high priority. Many young people, me included for a time, know the rough amount of money they have in the bank, therefore know roughly how much they can spend. This is fine, so long as you manage to keep your loose rules straight and your assumptions are correct. If not, it could lead to some serious problems.

You see, for me, while my acute money tracking may seem like an insane obsession from the outside, it is quite the opposite. I spend a few minutes every day reviewing and updating a spreadsheet, make a quick mental note on where I am with my “fun” money for the week and then not worry about it again until the next time I sit down with it. It’s that simple.

While tracking your finances to the level that I do may not be your thing (or may make you question my level of sanity), I think that creating a budget is something that everyone can and should do. It sounds very grown up, and even hard, but it’s not as difficult as you may think.

It really just comes down to simple math:

  1. Take what you earn, subtract your fixed costs (rent, phone bill, car insurance)
  2. Determine your savings needs (retirement, going on a trip, new tv)
  3. With what’s left over reasonably project your spending

It’s important to do the above in order! Many people reverse numbers 2 and 3, budgeting what they would like to spend and saving anything that is left over. This is dangerous, because we would always want to spend more, but the reality is that ensuring you are saving enough for your future is more important that a few extra meals out with friends.

If at the end of the month, you have run out of money or have more left over than you thought you would, then revisit your budget and make some adjustments. Either tighten your belt or allow yourself some more room. Do this and see the stress of having to ask mom and dad for money to cover rent melt away!