Debt

Steer Clear of Payday Loans

payday loans are not a good solution to your money problemsWhile flipping through David Bach’s book Fight For Your Money, I came across a section on payday loans.  I have always known that payday loan companies ripped people off, but after reading this section of the book, I am more convinced than ever that payday loans should be absolutely the last resort in a financial emergency.  In fact, I wouldn’t even consider a payday loan as a feasible option.

First of all, if you take out a payday loan, you will be charged outrageous loan payment fees.  In the instance referred to in the book, a woman borrowed $400 and was charged a $60 fee.

Then, because she couldn’t afford to pay the full $400 at the due date, she was forced to take out another payday loan to pay off the first loan.  This caused her to pay yet another ridiculous loan fee.  Payday loan companies do not accept installment payments, so if you don’t have the means to pay off your initial loan, they have got you exactly where they want you – you will end up in a vicious cycle by taking out one loan after another in order to pay off the previous loan.

By the time the woman had enough to finally pay off her debt with this particular loan company, she had paid $1,780 to borrow the $400! That means she paid 445% in interest charges!  Unfortunately, some payday loan customers get stuck paying as much as 1000% in fees and interest charges as it takes them longer to get out of the trap.

Payday loan companies may seem attractive, as they are willing to lend to anyone with a job, even if they have bad credit.  Before resorting to such an option, do your research and make sure you understand the full implications of taking out a payday loan.  Learn from other people’s mistakes and avoid falling in the payday loan trap.

November 15, 2009
Debt

Know The Dangers of Debt Consolidation

a debt consolidation loan may not be the answerInterest rates have been historically low over the past years and many households have been tempted with the opportunities to borrow to service their wants and needs. As a result many are now realizing that they have created an unserviceable debt situation and are looking for options to get them back on their feet. One of the common avenues to get out of debt is through a debt consolidation loan. While this might seem like a holy grail to get out of your debt situation there are some pitfalls that you need to be aware of.

The idea of a debt consolidation loan is logical enough, consolidate all your high interest loans and debts into a single lower interest rate loan with a single monthly repayment. It simplifies your debt repayment system because its just the one loan and it reduces your overall monthly repayment because it’s a lower interest loan.

The problem is that while a debt consolidation loan is a good option for many people it can also often be misused. For instance if you consolidate your debt through accessing your equity on your home you have dealt with the immediate problem of your debt but you haven’t actually dealt with the cause of how you got into debt in the first place. Many times after a debt consolidation loan they often get into debt through their credit cards and all of a sudden they are in a worse predicament then they were before the consolidation loan.

If you are to pursue a debt consolidation path you need to be willing to first deal with the cause of your situation. There is no point looking for a quick fix to get you out of your immediate jam only to get into a bigger debt problem further down the road and no longer having the option to consolidate.

If you know you aren’t disciplined enough to deal with the causes of your spending you are probably better off not consolidating your debt. That way you are forced to face your mess daily and by learning to pay off your high interest debt slowly you may eventually drill some sense into you and realize the futility of spending unwisely. It is only through changing your spending habits will you really benefit from a debt consolidation loan anyway so why not learn through managing your current debt mess than learn through a debt consolidation loan only to find that the mess has now gotten bigger.

At the end of the day you need to realize that there is nothing that is going to be a quick fix in life.  While a debt consolidation loan makes logical sense, it is only going to be a temporary band-aid solution if you don’t get your spending in order.

 

November 13, 2009
Budgeting

Never Give Up – You Can Develop Effective Money Management Skills

never give up - you can take charge of your financesAlthough you may have failed at managing your money wisely in the past, it’s never too late to start to develop good habits.  Whenever you begin to feel it’s a losing battle or that there is just no way you can make ends meet let alone save for your retirement, think of WD-40.

For those of you who have never heard of it, WD-40 is a spray designed to repel water and prevent corrosion. It’s creator, Norm Larsen, invented WD-40 in 1953 after 40 attempts!  That means he failed 39 times before finally getting it right!  He was persistent.  If he had given up, the world would never have been able to benefit from such a product.  In the same way, you cannot afford to give up on developing good money management skills.  Giving up is not the answer.

There are many ways you can improve your money habits.  You can meet with a financial planner at your local financial institution and they can crunch some numbers and help you to create feasible goals for yourself.  You can create a budget and stick to it, and you can also read books and Internet articles that will give you ideas on how to save money and invest it wisely.

Although it will take discipline now and mean that you will be making some sacrifices in the present, you will reap the benefits in the future.  The sooner you start getting your finances in order, the better off you will be.

November 11, 2009
Investing

The Beauty of Dollar Cost Averaging

the beauty of dollar cost averagingDollar cost averaging is what you are doing when you contribute to your investments on a periodic basis such as monthly or biweekly, rather than putting down a one-time lump sum.  The advantage to dollar cost averaging is that you don’t have to worry about “timing the market”.  Instead, you buy units or shares when the market price is both high and low.  Over time, this results in a lower average unit price then if you made a lump sum contribution.

You may be doing this inadvertently but many sophisticated investors use this technique as well.  Dollar cost averaging helps you to have a positive perspective even when the markets are down, because it means that you are buying units at a cheaper price.  It’s important to note, however, that dollar cost averaging is only helpful when you are investing for the long term.

If you are interested in learning more about dollar cost averaging, check out the article at this link.

November 9, 2009
Investing

Start Saving Now For Your Children’s Education

the time to start saving for your children's education is nowDo you hope that your children will one day get a post secondary education?  Are you planning on helping them out with funding at least part of it?  If so, I would highly recommend that you begin saving now.  For Canadians, a Registered Education Savings Plan (RESP) is a good option.

When you contribute to an RESP, the Canadian government will provide grants and bonds that will aid you in helping to save for your children’s education.  Although your contributions to an RESP are not tax deductible, the earnings are tax sheltered until withdrawn and are taxable to your children at a much lower tax bracket.

The earlier you start saving, the better.  To illustrate this, let’s imagine that you want to fund 4 years of post secondary education for your child.  Let’s assume that in 2009 it costs $7000 per year for tuition, and that your child will begin university at age 18. Taking into account inflation, if you begin to save within an RESP when your child is first born, you will only need to tuck away $80 per month for 18 years. That works out to $17280 out of your pocket.

With the same scenario as above, if you begin to save when your child is 5, you will need to tuck away $122 each month for 13 years, which works out to $19032 out of your pocket.  If you start when your child is 10, it will cost $214 per month for 8 years, costing you $20544.  And, finally, if you wait until your child is 15 to begin saving, you would need to come up with $676 monthly for 3 years, which works out to $24336.  So, as you can see, the later you start saving, the more burdensome it will be and the more money will need to come out of your own pocket.

In a previous post I wrote about the importance of indexing your investment contributions to inflation, meaning that it’s a good idea to increase your contributions by at least 3% each year.  The numbers below show the savings you could enjoy if you were to do so.

START AGE                       FIXED                  WITH 3% INCREASE/YR

0                                             $80                           $64

5                                             $122                         $103

10                                           $214                         $193

15                                           $676                         $656

The time to start saving for your children’s education is now.  The sooner you begin, the easier and more manageable it will be to help your children to get a good start at a promising future.  For more information on RESPs, check out this link.

November 7, 2009