Gails Blog

I started shooting Season 6 yesterday. We’re working with a lovely couple… Amy and Paul… and I have high hopes for success.

I’ve got ANOTHER wicked cold and spent most of the day in a snoot-filled haze. I managed to:

a) misplace my Visa card,
b) try to walk out of the drugstore without signing my chit
c) leave set with PJ’s shoes instead of mine.

I called and put a hold on my Visa card, and found it this morning in my car. I was recognized trying to steal from the drugstore by a show fan who promised not to tell. And PJ texted me last night to say I owe her $20 because she couldn’t go on her date wearing rain boots. Hmmm. It’s her own fault, really. She liked my shoes so much, she went out an bought an almost identical pair, and that’s why, in my haze, I picked up her shoes. I take her copying me as a huge complement, actually, since she’s very cool and the fact that she wanted my shoes, well, that says it all, eh?

Lives are funny things. Everyone has a different set of priorities, a different set of needs. And we all have a way of muddling through to get what we want. We also have a tendency to make the same mistakes over and over and over.

PJ’s thing is shoes. She’s got a HUGE shoe fettish. I love books. I spend gobs of money on books, both recorded and the printed versions. For other people it’s technology, clothes, home furnishings, pets. As many things as you can name, people can purchase to excess.

I don’t have a problem with people blowing a whack of cash on whatever their whim is, providing they can afford it. It’s the people who just can’t make ends meet, who refuse to adjust their spending that I scratch my head at.

One of the most interesting things about doing the show is being able to take a look into people’s lives, behaviour and justifications. Each couple has their own story, but over dozens and dozens of shows, I’m seeing some common mistakes. Are you making any of these?

1. Carrying a balance on credit cards. Sadly, many people don’t even know how much they owe. And they don’t know what their interest rate is. John Wayne said, “Life is hard. Life is harder for stupid people.” Hmmm.

2. Letting their expenses get out of control. I routinely cut my couples’ variable expenses by 60%, 70%, 80% and they do it. The live on 20% of what they were spending before. How is that even possible? When I ask, they tell me, “We’re paying attention.” What a concept!

3. Taking payday loans. What the hell are ya thinking? If you can’t afford to live on what you’re making now, how are you going to make it through next week when you have to repay the loan, plus the interest (upwards of 700%, when you include the fees). If you need money that badly, sell something or get another job.

4. Having no emergency fund. You know where this leads. The first time something breaks, it’s back to the credit card or line of credit. If you don’t have a financial safety net, you will fall and break your neck. It’s only a matter of time.

5. Buying a house that’s too expensive. No money down, amortize forever has led people to believe they can afford houses that are more expensive than they can actually manage. If you had to save 20% of a $400,000 house - that $80,000 - you might think twice about buying such an expensive house. I know houses have gone through the roof, but that’s no excuse for strapping your cash flow to the point where you’re living on the edge all the time. That’s a sure way to destroy your relationship.

6. Paying only the minimum amount on debt. So you really don’t want to be out of debt then, right? And you don’t much care how much it costs you. So quit your whining.

7. Using debt to repay debt. That’s balance transfers, cash advances on credit cards to make minimum payments, or using your line of credit to pay your minimum on your credit card. This used to be illegal, but in the name of marketing and selling more credit, the balance transfer (using credit to pay credit) was created and now the line is so blurred that people think it’s fine. It’s not. And it’s going to catch up with you eventually.

Statistics Canada has gobs of interesting information about how Canadians are doing financially. If you’re from the U.S., we’re doing marginally better in the north, but quickly heading into your kind of trouble.

Did you know that 25 years ago, 39 percent of us were spending MORE than our pre-tax income. Uh-huh. More than our pre-tax income. What were we thinking?

Things are better now though. NOT.

Nineteen years later, 47 percent of us were spending more than our pretax income. Wow! That’s almost half of Canadians spending more than their gross income. How is that even possible?

Credit.

Yup, you can spend more money than you make if you have access to credit. And most of us do.

Well, we’ve had a booming economy for the last six years, so things are probably better now, right?

• In 1999, Canadian families had over $29 billion in line of credit debt. By 2005, that had grown to almost $68 billion.
• In 1999, Canadian families had almost $16 billion in credit card and installment loan debt. By 2005 that had grown by over 58 percent to almost $26 billion.
• In 1999, Canadian families had over $33 billion in vehicle loan debt. By 2005 that had grown by over 41 percent to over $46 billion.
• In 1999, Canadian families had over $17 billion in student loan debt. By 2005 that had grown by almost 16 percent to almost $20 billion.

 Source: Stat Canada

Add it up… $68 billion + $26 billion + $46 billion + $33 billion + $17 billion = $190 billion in debt spread over approximately 7.5 million Canadian families. That doesn’t include mortgages! And since there are lots of us that don’t have huge debt loads, think what that means for the poor people who do.

So, are you a credit sap? Are you one of these statistics, spending more money than you make, living beyond your means, buying today’s goods and services with money you may or may not earn tomorrow? And are you happy about the amount of interest you’re paying? Do you even know how much interest you’re paying?

You don’t have to live in debt. You can change your life. But you have to really want to. And you have to accept that you’re going to find it hard to do.

It will be hard. But if you have the gumption, you can do it. I know you can.

The first thing you have to do is take all your credit cards but one and cut them up. Include your department store cards. And unless you’re getting a discount on gas, include your all your gas cards too.

Next, take the credit card you’ve kept and put it somewhere hard to reach - freeze it, bury it in the backyard, throw it behind the refrigerator.

Now you’re on your way.

What’s next? You’ll have to make a budget, create a debt repayment plan, and rebuild your credit history (if you’ve made it messy). And you should negotiate with your creditors to either consolidate your debt at a lower cost, or reduce the amount of interest you’re paying on your various forms of credit.

Most important, you have to stop shopping. Make a promise to yourself that you won’t buy another unessential thing (so nothing beyond what it takes to keep body and soul together) until you’re out of debt.

All the tools you need to achieve a debt-free life are here on this website. If there’s something you can’t find, let me know (through Questions) and I’ll try to help.

So, are you ready to be debt free? Is 2008 the year you’re going to do it? Great! Make me proud.

BTW: I know I still owe you an answer from yesterday’s blog, but you’ll have to be patient. I’m giving all the people who are figuring out what they’re spending some time to do their numbers. Stay tuned.

As if credit card companies aren’t making enough money on the interest they charge, they’ve initiated new rules that let them grab even more interest.

Once upon a time, if you paid your balance off in full every month, you were changed no interest. If you carried a balance for one month because you missed your payment date by even a few days, but then stayed clean from there on in, you weren’t charged interest beyond the first month.

But now there’s a new interest calculation method in town, at least for some credit card clients, and if you are one of them you should be hopping mad about it.

I’ve recently been hearing about credit cards that do not stop calculating interest on their credit card balances until the cardholder has been balance free for two months. So I went looking and found who the culprits were.

To see how these two methods differ, let’s look at an example:

Polly didn’t pay her December balance in full, so she carried a balance of $1,000 from December. On January 10, she put her $2500 vacation on her card. She then paid her new balance in full by her due date of February 9. Here’s how the two different methods would affect her. 

If Polly’s credit card issuer uses Method 1, she will have to pay interest only on the $1,000 carried over from December. She will get the interest-free period on her new purchase of $2,500, because she paid her current balance in full by the due date of February 9.   If Polly’s credit card issuer uses Method 2, she will have to pay interest on the $1,000 carried over from December and on the new purchase of $2,500, because she carried a balance over from December.

That’s ludicrous! What a lot of crapola. So credit card companies who can’t make money of people like me because we don’t usually carry a balance are stooping really low to grab some interest.

Who are the offenders? The Bank of Montreal, the Royal Bank and CIBC. Shame you them. Such a blatant grab. Things must be looking pretty bleak on the bottom line, eh boys?

This is a mind-set that is catching. It is in line with the way interest is calculated by a number of American credit card providers including Amex Bank, Citibank, MBNA Canada and Wells Fargo Financial Corp.

If you want to see if your credit card is an offender, check out the comparison chart at the Financial Consumer Agency of Canada. 

If your card uses Method 2 (boo! hiss!!) you can either:

• suck it up and don’t complain, because you’re choosing to use a card that is gravalicious (Jamacian for “greedy beyond comparison”) 
• call and tell them just what you think and then go shopping for a new card.

I’m about to implement Option 2.

I think it is outrageous that because a number of other credit card companies have dubious interest-rate calculation policies, this means our banks are going to follow suit.

I think it is shameful that financial institutions believe they can just pull stuff over consumers’ eyes. Sure, they’ll say it’s in the cardholder agreement, but they know that since it’s printed in gray and in mouse-print, it’s unlikely that anyone will read it. We get used to things being a certain way, and then they change it, hoping it will get by most of us, and is does.

And I think it’s shameful that our friends, brothers, sisters, mothers, fathers, cousins, and whomever else we may love are being duped.

You have my permission to copy this article and send it to everyone on your email list.  Do it! Let’s see how they like it when they start getting a b’zillion calls complaining about what stinkers they are.

Of course, if you can’t be bothered, don’t come whining to me later when the interest clock clicks on for your credit card because all the other lenders see how easy it is to take candy from you babies!

I was talking to a friend a few days ago about the pros and cons of overdraft protection and I thought about all the people I’ve worked with who have this feature on their accounts.

Overdraft protection is usually sold to people when their open their accounts as the way to ensure that bounced cheques don’t ruin their credit ratings. When you try to spend money you don’t have in your account, the bank covers the withdrawal - be it a cheque, debit or cash withdrawal.

Don’t confuse the kind of overdraft protection you “buy”, for which you sign an agreement, with what some banks call “bounce protection” or “courtesy overdraft protection” which they offer to save you from the embarrassment or hassle of a returned cheques (which, I admit, can be very expensive).

According to www.bankrate.com, the average courtesy overdraft fee is $29, but fees can be substantially higher. And since the fee is levied regardless of the amount you go into overdraft for, it can be astronomical when you calculate it as a percentage of the “loan.” One woman wrote me to say that she was appalled when her statement came in and she had over $160 in bounce fees.

I’m all for the traditional overdraft protection for which you sign an agreement so you know what you’ll pay in interest (it is much higher than you might think). It beats the pants of NSF fees and the bruise on your credit report.

What I’m not for is the idea that overdraft protection gives people a license to ignore their cash management. They can spend whatever they want, whenever they want, because overdraft protection is there to catch them like a safety net.

While some of you might think, as I do, that overdraft protection is a short-term affair - most overdrafts are said to last only about 5 days or less - I’ve met oodles of people who practically live in overdraft.

The banks don’t mind one little bit when you go into overdraft, since overdraft interest rates are well above regular lending rates - one bank I checked charges 21% interest on your outstanding overdraft — and going into overdraft automatically triggers a monthly fee. If, in fact, overdraft is just for the odd slip as the marketing material says, then why do some banks offer the option of going $5,000 or more into overdraft? That’s NOT a little slip.

The answer to running into overdraft is not overdraft protection, it is to better manage the cash in your account so you don’t try to spend money you don’t have. Hmmm. What a concept.

How do you do that?

Easy.

Get yourself a notebook. When you put money in your account, add it to your balance. When you spend money from your account (be it a cheques, bill payment, a debit card transaction, or a cash withdrawal) you debit that amount from your balance. Keep your eye on the balance.

If you think that sounds like too much work, you’re a dope. You’d work at least this hard to find where gas is selling for a penny less, or where tuna is two for $1.39, or where wings are all-you-can-eat for $3.99. Staying out of overdraft is one of the best deals going.

I received a question from Beverley who wanted to know what I thought about borrowing money to catch-up unused RRSP contribution room - you know, all those contributions you didn’t make because you’d spent all your money!

I thought this might be on more than one person’s mind since it’s RRSP season and the marketing material is flying in the door at a wicked clip. Remember, by its nature, marketing material is designed to show you the positive side of a strategy so you’ll want to take advantage of the “offer.” But not all offers are worthy of your attention.

Beverley borrowed $65,000 last year and thinks she might borrow again this year to complete the catch-up of her unused RRSP room. These “Catch Up Loans” were popularized by a particular bank that sold the pants off them, and laughed all the way to the vault.

If she goes through with her plan, when all is said and done, Beverley will have an outstanding loan of $103,000 at “prime” (because she’s tied the loan to her home equity) and plans to repay $1,000 a month.

It will take over TWELVE YEARS for Beverley to repay this loan.

It will cost Beverley over $42,000 in interest by the time the loan is repaid, assuming her interest rate does not go up one iota over the next decade. Hmmm. I wouldn’t take that bet!

Do I think this is a good idea?  I DO NOT.

I hope Beverley’s income is high enough - in this case well over $100,000 a year - so she’s getting full use of the RRSP tax deduction? If not, then what’s the rush? Keep in mind, too, that if interest rates go up Beverley could find her payments increasing putting more pressure on her budget, since the loan rate is only fixed for the first year

With loan repayment eating up a large slice of her budget pie, will Beverley be able to afford to make her regular RRSP contributions?”  If the answer is “No”, at the end of the catch-up loan, she would have to catch up the contributions she didn’t make while she was repaying the loan. Sounds like a Catch-22 to me.

Here’s an option Beverley might want to consider instead of taking out another loan. She could make her maximum RRSP contribution for this year using a monthly investment plan. Then she could also contribute the amount she would have made in loan payments to her RRSP on a monthly basis. It may take a little longer to catch up, but she would have no interest costs. All her money will be working for her, instead of making a bank even more profitable.

I wonder, too, if Beverley knows what the Alternate Minimum Tax (AMT) is? The purpose of the AMT is to ensure that people who make a certain amount each year don’t get off scot-free tax-wise by accumulating deductions. She should do the AMT calculation before deciding how much she will catch up at one time.

I’m not a fan of catch-up loans. I think they play into people’s needs for immediate gratification. And that immediate gratification comes with a heft price tag. In Beverley’s case, that would be over $42,000 in interest.

We’re moving into very uncertain economic times. The US economy looks like it’s headed for the dumper. The markets are zipping and diving, dodging and weaving. No body knows what’s going to happen next. And we haven’t seen the last of the billion-dollar write-downs for misjudging the credit marketplace. This is no time to be taking on debt.

Saving and investing are long-term, slow and steady propositions. If you want to catch up your RRSP unused contribution room, trim back on your expenses or make enough extra money to sock away what you want. Don’t borrow it.

Are you a sucker? If you make only the minimum monthly payment on your credit card balance you are.

Sounds harsh, eh? Yup. It’s meant to be.

I’ve asked people if they pay off their balance every month and they’ve said, ‘Yes” and then when I’ve said, “Your entire balance?” they’ve said, “Yes, every month I make my minimum payment on time.”

We’re not even speaking the same language

So do you know what it costs to buy something when you make only the minimum monthly payment every month? Let’s have a look at a credit card balance of $1,000 with an interest rate of 18%.

Minimum monthly payment          Interest cost

          1.5%                                               $9,015

          2%                                                 $2,852

          2.5%                                              $1,496

          3%                                                 $1,000

If you’re shaking your head in total disbelief… whaddaya mean $9,000 in interest?… think about it. If you’re paying a minimum of just 1.5%, you’re barely covering the interest cost on that 18% card, never mind paying off any of the $1,000 principal.

The only way to get rid of your credit-card debt is to make payments early and often. You can’t settle for the minimum payment. Unless, that is, you’re determined to make your credit card company RICH.

Any extra cash you can squeeze out of your budget applied to your credit card is money well spent. Cut out the coffee, the newspapers, the magazines. Cut out the restaurant meals, the new clothes, the movies. It won’t be forever. Nope. And when you’re finally debt free you can blow a great big raspberry at the credit card companies and say, “Never again!”

I’ll bet you right now that you haven’t read your credit card agreement. If you have, I owe you a cuppa. But if you haven’t, you have to mail me a tea-bag: RR#1, Warkworth, Ontario, K0K 3K0. I like Earl Gray, but you can always send something you’re fond of and I’ll try it!

So, why don’t people read their cardholder agreements? Could it be that you just can’t handle the mouse-print? Hey, I feel your pain. Or maybe it’s because the language the credit card agreement uses is total baffle-gab designed to obfuscate and confuse.Do you even know the interest rate your card it charging you?

If you look at your last statement and find yourself surprised at how much you’re paying in interest, it may be because some card companies practise hair-trigger re-pricing, moving people quickly from low rates to high penalty rates. If you miss your due date by even one day on a low-interest introductory rate, you’ll find yourself paying a much higher percentage in interest.

According to Robert Manning, author of Credit Card Nation: The Consequences of America’s Addiction to Credit, the cost of borrowing money on credit cards has tripled since the early 1980s. It’s not just the ridiculous interest rates that credit companies charge, it’s also the variety of fees and punitive clauses that have people paying exorbitant amounts. So why do we pony up and pay? What’s wrong with people? Why would you use a card charging 18, 24 or 29 percent in interest, and then add on a “member fee”, an “over-limit fee” or an “account balance premium”? 

According to www.consumer-action.org, 94 percent of credit cards charged over-limit fees ranging from $20 to $39 monthly until the cardholder’s balance falls below the limit. The average late fee is about $28. And penalty interest rates can run as high as 32%. Ouch!  

The biggest reason people end up paying too much to credit card companies is that they don’t shop around. People commit to a card because it offers points, travel miles, or some other incentive and then they stop paying attention to their costs. Want to find out how you can get a better credit card? Check here to see what’s for sale.

Remember, you’re buying credit. And if you were buying a house, a car, new furniture, or a new computer, you’d shop around, right? (You better say, “Right, Gail!”) So if you’re buying credit, you should shop around.

You can’t go whining about how much the credit card companies are ripping you off if you’re too lazy to find yourself a better alternative. And if you don’t even know what you’re paying, that’s just dumb! 

Feel like kicking up some dust? Drop a barrage of email to your credit card company telling them you want your agreement in English and in a print size you can actually read, why-dontcha?

Student loans are a huge problem for lots of people. And it’s no wonder, really. After all, the way the system works now, you figure out where you want to go to school, apply, get in, apply for a student loan, are granted one, and then you proceed to rack up the debt until you’re finished school, at which point your student loan becomes repayable.

No one ever stops to think about how much of a payment they can afford, based on the income they can expect from their after-school careers.

Parents don’t stop to think. Students don’t stop to think. School counselors don’t stop to think. Universities don’t stop to think. The financial media doesn’t stop to think.

The result: students are graduating from universities and colleges with debt that’s as heavy as Mama Cass.

The student loan system isn’t doing very much to help either. Students regularly choose the “variable interest rate” option on their student loans because it is cheaper, and then start paying back their loans. What they don’t understand is that when interest rates inch up, but their payment amounts remain the same, more of their payment is going to pay the interest, and less to pay the principal they owe. I worked with one woman who, after paying her student loan for two years, had paid off a whopping 17 cents.

Most students don’t look at their loan statements. When I showed Chantelle her statement with the 17 cents paid off, she just about fell over. Well, why would they? Look at their statements, I mean. Lots of their parents hide their financial statements, throwing them in draws or boxes or trash bins and pretending they don’t exist.

What’s the answer?

We need to talk to our kids about the responsibility they assume when they take out a student loan. We need to help them see how much debt they can handle without strapping themselves so tight they squeak.

There are tools available. Go to canlearn.ca for great calculators and advice on managing student loans. My favorite is their Loan Repayment Calculator. Using it, you can figure out just how much debt you can afford to take on to work your debt repayment into your cash flow once you graduate.

Remember, as a rule of thumb, you shouldn’t spend more than 15 percent of your net income on debt repayment (not including housing and transportation).

This will take some thinking about. It’s not an easy-peasy exercise. You have to research what you think your income will be at graduation. So maybe an undergrad degree in Ancient Egyptian Art won’t really pay off. You should do some pretty detailed research about how to get as much free money as you can. And you have to make some decisions about your school/work balance while you’re getting an education so that you don’t end up with Mama Cass sitting on your shoulders at graduation. The effort will be worth it. I promise.

I opened up the mail this morning to a offer from citifinancial: The extra cash you need to give them what they want.  Citifinancial, with whom I have never dealt, was offering me $5,500 or more so that I could spend money I hadn’t yet earned. Sure they said they were offering me “cash.” But that was a lie. “Cash” wouldn’t have to be repaid. No, what they were trying to get me to buy was “credit.”  Is it really any wonder people are confused about their responsibility when they use credit? I’m not absolving dopes of their responsibility when they choose to buy stuff they just can’t afford. But the language the financial services industry uses can be very deceptive and credit providers are the WORST. Flip my little offer over and read the finer print and you’ll see an example of what using Citifinancial’s offer would cost. A loan of $1,000 at 29.5% (What?!) repaid over 12 months would cost just $97.24 from cash flow.  Com’on now, with the pressures of the holidays and keeping up with your richy-rich brother-in-law knocking at the door, who couldn’t work  a measly $97.24 into their budget. Hey, but they offered me $5,500, and fully expect me to use the whole thing. At a ridiculous 29.5%, that $5,500 weakness, self-indulgence, whatever you want to call it, will end up costing me over $900 in interest, and that’s if I pay it off in one year. Longer and I’m on the hook for even more. Getting credit is easy. Buying pretty stuff is easy. Giving people great gifts and looking like a star is easy.  Paying it all off, not so much. Before you go shopping and blow your brains out this holiday season, take five minutes to read Gail’s Guide to Holiday Shopping  and use Gail’s Holiday Spending Plan to make yourself a budget. It’ll not only help you get organized, it will remind you of some of the costs you may have overlooked.Have a Happy Ho Ho Ho! And when it comes to your New Year’s Resolutions, start now and promise yourself you’re not going any further into the hole. I’m off to recycle my “special offer.” The cat litter needs changing!