Net worth update – December 2011

I hope everyone had a nice Christmas break! I have to apologize for not writing for almost a week; tis the season! As the year is wrapping up and I am doing my year-end analysis, I decided to do a quick post on my net worth as it has been an interesting year for me. Taking a year off is great, and I highly recommend it, but I want to understand what impact it has on my financial situation. How could I determine what the year off cost me? Change in my net worth calculation of course! I’m a huge advocate of calculating your net worth; it is like taking inventory of all your workers (every dollar you have has the potential to work for you) and making sure they are working instead of on an extended coffee break.

Assets:

–          Cash – 0.77% of assets (-26.36%)

–          Savings – 23.61% of assets (-56.91%)

–          US cash account – 15.06% of assets (-1.45%)

–          Investments (Stocks) – 41.95% of assets (46.68%)

–          Investments (Other) – 18.61% of assets (+100.00%)

Liabilities: 0

Total Net Worth: -0.74%

I know it’s a lot of numbers, and since this is my first post about my own net worth, I decided to start off with just percentages. The change in brackets aren’t very good indicators either, since most of change has been a result of allocation rather than actual increases or decreases. Going forward, the changes should be more reasonable, or at the very least, make some sort of sense. 🙂

Quick notes:

–          I originally had a lot of money sitting in savings which I have allocated towards investments this year; this corresponds to the large increases in my investment categories. More workers working and not on extended coffee breaks!

–          I have 15% of my assets in US cash as a result of selling my company stock (I was forced to) when I left my job. I have been keeping this as a cushion for my ‘retirement’ but I may decide to start investing this piece this year.

The biggest thing I got out of this exercise was the total change in my net worth since last year. Even without pulling in a paycheque, my net worth has only decreased by 0.74%. I know there were a lot of factors that helped (tax refund, excess pension plan contributions refund etc) that I won’t be receiving this year, but it’ll be interesting to see how this year pans out.

How was the year for you financially? Have you set any goals or resolutions for the year? Do you have any financial goals for 2012?

Thanks again for reading! I hope that you and your family have a wonderful New Years Eve and a wonderful year filled with love, health, and laughter!

Merry Christmas!

It’s been just about a month and the response to the blog has been overwhelming! Thank you everyone for reading and supporting me. Thanks for all your patience when I start talking about personal finance. 🙂

I hope you and your family have a wonderful Christmas! Happy Holidays!

Case Study 1: Introduction to Edward and Bella

Yes, Bella and Edward Cullen. Yes, I read and watched Twilight. I have to admit that I am somewhat embarrassed (sometimes) about admitting that. But if I’m telling people to face their financial reality, the least I can do is admit that I enjoy Twilight. Yes, I know this may be enough for some of you to leave before continuing on with the rest of this post. And no, this is not their actual situation.

I have no debt. Yes, yes, good for you. I help other people face their financial reality and help them get out of debt. Yes, yes, good for you. But, how do you do it?

With the permission of one of my clients, I have decided to post their situation and their monthly progress on the blog. What’s the purpose? Hopefully, it will give those in a similar situation some tips on how to get out of debt themselves. Or, at the very least, contact me so I can help them out. Also, since the progress is being publicly documented, I hope this will help keep them accountable!

So, where do we start? Net worth calculation of course! They provided me with all their current bank statements, credit card statements, investment balances, etc. Not all are as of December 2011, but like I said, estimates are better than nothing.

December 2011

Assets
Chequing

1,353

Savings 1

127

Savings 2

1,200

Term deposit

16,149

RRSP 1

15,242

RRSP 2

30,849

Total

64,920

Liabilities
Credit Card 1

23,044

11.99% interest rate

Credit Card 2

5,075

21.99% interest rate

Credit Card 3

1,682

29.90% interest rate

Credit Card 4

2,563

29.90% interest rate

RSP Loan

19,720

13% interest rate

Credit Card 5

7,939

19.99% interest rate

Home Renovations

1,975

0% interest rate

Total

61,997

Net Worth

2,922

Obviously, they are living above their means and the bank and credit card companies are making a mint off of it. Well, what are they spending their money on? In comes the spending analysis, a.k.a., the Budget. Based on the past 3 months expenses, they are spending about 58% of their income on fixed expenses (rent, insurance, interest charges, etc), and 54% on variable expenses (groceries, eating out, entertainment, etc). When they looked at what they were spending on some of the categories, they were shocked! Notable ones include over $530 a month on interest and bank charges, over $1,800 a month on car expenses (gas, insurance, repairs, etc) and about $1,000 a month on groceries. Not food, groceries. And no, they do not have teenage boys eating them out of house and home.

Month 1: Action items

  1. Cash only. No more credit cards or debit cards.
  2. I set up a budget for them. Yes, I know, most will hate this step, but we need to have an understanding of where the money is going and learn to curb the spending.
  3. I want them to reduce their fixed expenses down to 42%. This will involve steps such as cutting out unused cable services, removing an unnecessary cell phone and paper billing (cell phone companies charge you money to send you a bill. Seriously?), and remove any unnecessary bank charges.
  4. I want them to reduce their variable expenses down to 13%. This is going to be the interesting part. They will have $700 that will be used for groceries, transportation  including gas and any transit passes, as well as all entertainment, clothing, haircuts, subscriptions or eating out with friends.
  5. Change any credit cards with annual fees to cards without annual fees.

Month 1: Goals

  1. Credit Card 3 will be paid off.
  2. Additional payments, beyond the minimum payment, will be made to credit card 4. I want to systematically pay down their credit cards, starting with the ones carrying the highest interest rates.
  3. Set up an ASP after opening an ING Savings account. This will serve as their emergency fund.

The first month will prove to be the hardest. I will do weekly meetings to ensure that they keep on track and to answer any questions or concerns they may have. It’s going to be an interesting time as I built a budget based on only 3 months data, so I am unsure how this will work for the rest of the year.

What do you think? Are you in a similar situation? What would you do if you were? What do you think of my action items and goals? For those who don’t want to do a net worth calculation because they ‘don’t want to keep track,’ I strongly suggest you do. It’s a worthwhile exercise that will allow you to face your financial reality. Your future and your family’s future depend on it.

If any of my fellow bloggers or computer geeks know how to insert a table properly on to this interface, please let me know! 🙂

I need your help! As this is a new blog, please spread the word on Facebook and/or Twitter! Or email the link to a friend or family member!

https://vixymoney.wordpress.com/

Gassy Radical Robots Should Poo (GRRSP)

Yes, its late. I’m not that creative when I’m fully awake. Writing after midnight could prove disastrous.

So moving beyond pooing robots, Group Registered Retirement Savings Plans (GRRSP) are sponsored by employers. They are similar to RRSPs, but are administered by the employer. The great thing about these plans is that the contributions are made through deductions in your payroll. Ahhh! Less money from your paycheque! How is that a good thing? But it is good because this is one less thing you have to think about. Forced savings. I ❤ it. I’ve had lots of questions on these plans, usually referred to as that thingy that my employer has that I contribute to for retirement. I think. Anyways, if you are fortunate enough to have an employer who provides this, this is a great Level 4: Investment cheat.

How much should I contribute?

If your employer provides a match, contribute enough to get the full match. This is FREE MONEY that your employer IS THROWING AT YOU. If you need to contribute 4% to get a 4% match, contribute the FULL 4%. Think of it as an instant 4% pay raise, just for being you! Or, put another way, it is a 100% return on your money. Hard to beat that, I assure you.

What should I invest in?

Once you move beyond the initial procrastination and actually sign up, choosing your fund allocation could prove to be the next big deterrent.  I’ve heard of people randomly choosing a selection of funds from the list that the employer provides. Eeny Meeny Miny Moe. Spell check that all you want; Wikipedia says its right. Although this could prove to be entertaining, some may prefer a more systematic approach on selecting your investment allocation.

Step 1: Take your age (yes, your actual age, pretending is going to hurt no one but you). This is going to be your bond or fixed income portion. If your employer has a decent administrator, the list of similar types of funds should be grouped together. Go to the bond or fixed income section, and select the Canadian fund with the LOWEST MER. We all know why this is important. The one crappy thing about GRRSP is that you don’t have a choice on the selection of funds, although I have seen plans that provide index mutual funds selection. That alone was almost enough for me to want a job there. Almost. Or, you can make it your sole mission to advocate your employer to provide index mutual fund options. Those who complains the most and the loudest, wins. Those in the corporate world know what I’m talking about.

Step 2: Subtract your age from 100. Take this number and divide it by 3. Bear with me, this elementary math will soon be over. This number is going to be your allocation for your equities portion, and it will be split evenly amongst Canadian equities, US equities, and International equities. Once again, always look for the fund with the LOWEST MER.

That’s it. Take 5 minutes, sign up, and you will be well on your way towards a comfortable retirement.

As a recap, I’m 30. My portfolio is going to look like this:

24% Canadian equities

23% US equities

23% International equities

30% Canadian bonds/fixed income

Yes, I rounded up my Canadian equities so it adds to 100%. Yes, if your age doesn’t result in even numbers, you will have to do this.

How many of you have GRRSP? Are index mutual funds more common now than before? How many of you have these provided but are not a participant? If you are participating, are you maxing out the employer match?

I need your help! As this is a new blog, please spread the word on Facebook and/or Twitter! Or email the link to a friend or family member!

Tonight’s Smackdown: RRSP vs TFSA

When I ask people what they are invested in, I generally get two answers: a little bit of everything, or RRSPs. A little bit of everything seems to be a catch all and is a little discerning because it indicates that they’re not entirely sure, and/or that they lack specific investment goals. And RRSPs are not an investment. So let’s back up a bit and see if we can understand all these acronyms.

Registered Retirement Savings Plan (RRSP)

RRSPs are NOT an investment; they are an investment/savings vehicle. Put another way, imagine that you have a box that you are calling RRSPs. You can put investments, such as mutual funds, Guaranteed Investment Certificates (GICs), Exchange Traded Funds (ETFs), company stocks or shares, bonds, or even mortgage loans in this RRSP box of yours. The money that you contribute to RRSPs every year is tax deductible (for every dollar you contribute, your taxable income is reduced by a dollar during the year you make your contribution), and any earnings you receive from your investments are allowed to grow tax free. When you are eligible to retire, any withdrawals from your RRSP are taxed at 100%. Once you put money into your RRSP, and purchase your investments (mutual funds, ETFs, etc.) you are able to buy or sell any of your investments. There is a limit to how much you can contribute every year (18% of your earned income from the previous year up to a designated max), and if you do not make a contribution during the year, you can carry forward that amount and contribute that amount in the future.

My “two cents” on RRSPs:

–          DO NOT take out a loan to contribute to a RRSP. Your advisor/banker will advise you to do this to get the tax write off, but it really just pads their pockets. Yes, I know, interest rates are low, get a nice cheque back from government blah blah blah, but no. Sit down with me, and I would ❤ to run the numbers with you. An excuse to play with excel? Seriously, it would make my day.

–          Instead, figure out how much you want to contribute to a RRSP. Then, set up an ASP (automated savings plan) and have this money withdrawn from your chequing account each month. At the end of the year, you take this lump sum and make your contribution. Or set up an ASP to contribute automatically into a low-cost index mutual fund. This would be the best course of action for most people.

–          DO NOT make withdrawals on your RRSP before you retire. The current rules allow you to make tax-free withdrawals if you buy your first home (Home Buyer’s Plan), or want to go back to go back to school (Lifelong Learning Plan). There are rules on how much you can withdraw and how long you have to pay it back, but you are interfering with the magical powers of compounding by doing this, thus sacrificing your future for immediate gratification. If you want to buy a home, save up for the 20% down payment. If you want to go back to school, save up for it.

–          It might not make sense to max out your RRSPs every year. The money might be better utilized elsewhere (TFSA or mortgage). This is completely dependent upon your financial situation!

Tax-Free Savings Account (TFSA)

Easily the best thing the government has ever done for us. Honestly. A TFSA is also a savings/investment vehicle (box) that you put investments in. Basically anything you can put into a RRSP, you can also put into a TFSA. Beginning January 1, 2009, anyone over the age of 18 can contribute $5,000 a year into their TFSA, and all the earnings can grow tax free. You can withdraw the money any time you want, and re-contribute the amount you withdrew as early as the following year! The best part? All withdrawals are taxed at 0%. That’s right. 0%!

My “two cents” on TFSAs:

–          Everyone should be taking advantage of this gift from the government! As of January 1, 2012, you would be able to contribute up to $20,000 per person (assuming you haven’t made any contributions before).

–          If you are saving for a car or a downpayment or a vacation, it might be better to shelter that money in here. Even with the awesomeness that is the ING Direct or PCF savings accounts, the government will be taking their cut of any interest you earn.

–          Perfect for retirement savings as well! When you retire, withdrawals from RRSPs will be counted towards your income for the year and taxed accordingly. The income may affect your eligibility for Old Age Security (OAS) or Guaranteed Income Supplement (GIS). Not so with money from TFSAs!

Final Question of the night: If you retire with a million dollars, would you want it in a RRSP, or in a TFSA?

I need your help! As this is a new blog, please spread the word on facebook or twitter! Or email the link to a friend or family member!

Life As We Know It

This story came to me from a reader and a good friend.

My journey into debt hell, and the long climb out of it

This story may hit close to home to some readers; others will read this, shake their heads and say “how can someone be so stupid!” but it is one worth writing about, and – I would guess –  is a story that can be told thousands of times over by many people you see each day in your life.

Quick backstory of me: I have had a good job since finishing University, making “average” money. I really enjoyed buying things. EVERYTHING – cars, vacations, clothes, movies, video games, dinners – you name it, I probably had it. Only problem was – this all went on the credit card (outside of the car – that was financed). I had a budget imposed on me by my partner, but I would purposefully understate my income to them, to leave room for “fun” – when I wanted something, I would buy it. It was actually an addiction – there would be times where I would  get an unstoppable urge to go purchase SOMETHING new – even if it was something that I would never touch again (I still have movies I haven’t watched, and video games that have at most 5 minutes of playing time on).

I had a savings account set up as well, which I would put nominal amounts into each month, but that was done more to appease my partner  to show that I was committed to saving and was not done for the purpose of paying off my credit card debt (which had by then ballooned to ~$15,000). I knew having this debt was wrong, and “committed” to paying it off. I would continue to put some money into my savings (stupid) and would dedicate over $2000 each month to payments on the credit card… sounds good, right?? Sure, if I had only STOPPED USING THE CARD. I didn’t – my spending habits hadn’t changed, and each month I would see that not only did my debt not shrink, it was in fact still growing. It got to the point where I would not even open and look at my statements as I was terrified of seeing a higher amount owing, even after putting a $2,500 payment on it the month before.

I knew I was in serious trouble, but didn’t know where to turn. Those closest to me had no idea, and most assumed I was well off – nice car, plenty of travelling, new toys – things most people associate with success. I didn’t want to destroy this illusion. I didn’t want my partner to know as I knew they would leave if they found out – they abhorred credit card debt. I went to my financial institution to see about getting a consolidation loan to thus lower the interest rate I was paying on my debt, and hopefully pay the amount off faster without anyone knowing. Problem was, because of my extremely poor debt ratio and poor credit, the interest rate offered me for the loan was still double digits. I would also be required to cut up my card – I couldn’t do that – how could I explain to people why I no longer carried a credit card? So I continued to flounder, hopelessly lost, and getting buried deeper each and every day.

I had given up – outside of winning some sort of lottery where I could wipe out the debt in one fell swoop, I was resigned to the fact that I was f***ed. I would continue to throw larger amounts of money on it, but I never changed my habits, so my card was always close to being maxed out.  The CC company, however, was oh so nice to provide me with unrequested credit increases to make sure I could keep up my spending habits.

Thinking back on this now, the most terrifying thought is where I would be now if one thing hadn’t changed – my partner figured out my lies, called me on it, and instead of throwing my ass to the curb (which they had every reason to) told me they were going to make me fix this problem once and for all. I had to pull up my credit card statements, and all-in, I owed approximately $20,000 by this time. Going through the statements, it ended up that I was also a victim of fraud… to the tune of $3,500 (really, really stupid). Because I hadn’t even looked at my statements, it was past the period to challenge it, so I have now paid $3,000 for someone to have a trip on Air Canada somewhere nice… I hope they enjoyed it; I sure didn’t.

Fortunately, because of the original forced savings, I had the money to pay it all off at once. 2.5 years of savings wiped out. At the time, my net worth was an amazing -$8,000. Because of this, I was then forced onto an extreme savings budget – if I strayed, my partner would leave, and I am willing do anything for them.

All eating out was cut. ZERO retail purchases for me. Travel? Sure, to work and back. I remember one night we were out as a group for wings and beer – I had water. I didn’t want to be there, feeling so helpless, feeling so CHEAP… but I made it through that.  As I continued to save, a more reasonable budget was put into place – I had a set amount for eating out, a set amount to set aside for vacations, etc. Difference being that this time, there would be no hiding, no lies, and no binge spending sprees.

Fast forward 1.5 years to today. I own my car – no car payments, only regular maintenance fees (which I wish I could eliminate as well, and would, if I didn’t NEED a car). Net worth has changed from that negative $8,000 to a positive $40,000 – nowhere near where someone at my age should be, but an almost $50,000 swing in a year and a half is pretty decent in my books. I feel free now – there is no weight on me, and it is an absolutely fantastic feeling knowing that I owe no institution any money.

I recently had a conversation with someone who rarely sees me, and I was asked “so, what toy do you have your eyes on now?” My response: “Nothing.”

He was blown away; he told me that there was always some new toy that I wanted, but for me now, that is not important. I still get the occasional toy, but now it is done using gift cards received from work, birthdays, etc.

So what is the point of this long-winded commentary besides I am one incredibly lucky idiot? There is a light at the end of the tunnel. If you have credit card debt, get out of it now. It will require sacrifice; it may require a LOT of sacrifice – your current standard of living will likely change, and it will seem like it will change for the worse… but it is a necessary change. I was lucky that I was called out on it and held accountable by someone. If that didn’t happen, I would likely be sitting here, alone, with over $100,000 in retail debt. Hopefully you have someone in your life to hold you accountable – if you don’t, find someone. There are many friends and family out there who are willing to help you. I think almost everyone knows carrying debt on credit cards is bad, but the majority of people do… find that strength however you can, cut up those cards, and put everything you have to eliminate that financial cancer. The feeling of being debt-free is indescribable, and it will be worth every single meal, pair of pants, DVD, video game, concert, and trip that you gave up… honest.

I still have a long ways to go – I am not married yet, and the reason is because of my stupid spending. I do not have the cash to get married with, but I am working on rectifying that now as well – instead of worthless toys and numerous vacations, I am using my money for something far more important – a future for me, and the ones I love.

As more and more people are starting to face their own reality, their own truth about their financial situation, this story is more common than not. I would honestly like to thank my friend for sharing their story; it takes a lot of guts and bravery to share their story in hopes that it will help someone else in the similar situation. I know that people may feel embarrassed or ashamed to even admit to their loved ones what the financial reality is, but I believe that if you truly ❤ them, honesty isn’t the best policy, it is the ONLY policy.

Cheat for Level 6: Life Insurance

Who needs life insurance? I’m single with no dependants. No one is depending on the paycheque that I may or not be bringing in each month. If I was hit by a bus tomorrow, I will not be a financial burden to anyone. There is absolutely NO NEED for me to have life insurance at all. Unfortunately, a huge industry exists to sell me as much insurance as it can, whether I need it or not. Kinda sounds like extended warranty to me, but I digress.

If you do have a spouse or partner or kids, then you definitely need life insurance.  What are the questions you should be asking yourself when you are shopping for life insurance?

Do I really need Life Insurance? If you are at Level 6, you should know what kind of money is flowing in and out of your household every month. Now imagine if your paycheque stops coming in; how will that affect the people left behind? If you will have unpaid debt or mortgages, or even if the household relies on your paycheque to pay the bills, then you will need insurance.

How much Life Insurance do I need? This depends on how much you want to help those you have left behind. Some say 6 to 8 times your annual salary. This is a general rule of thumb, but it really depends on what you want to do with the money. Do you want your surviving spouse to be comfortable for a couple years after you are gone? Should there be enough money to pay off the remaining mortgage so that is not a burden? Do you want to leave enough money behind to help take care of your kids until they are 18? Help fund a Registered Education Savings Plan (RESP) for them? These are all questions to consider before determining the amount of Life Insurance you want to purchase.

How long will I need Life Insurance? Ideally, Life Insurance shouldn’t be a permanent need; it was never intended to be this. It was originally intended to protect people when they were younger and were starting to build their nest egg, and something suddenly happens to the breadwinner. As life progresses, you will continue to pay off your mortgage as well as save up enough money to fund your retirement and life goals. Ideally, by the time you hit retirement age, you should have sufficient savings to discontinue your life insurance. Before you discontinue your current insurance, always get a physical from a doctor to make sure you do not have a medical condition that would warrant continuing it.

What kind of Life Insurance Do I Need? Term insurance. This is what makes sense for the vast majority of people. You are buying ‘in case shit’ happens for the finite time that you need protection. That’s all you need. Term policies are the cheapest policies you can get because the probability of you dying in that time period is low (I was in the actuarial field, part of my job was to know what the probability of you dying in the next year is), hence the premium is lower. As a result of the premiums being low, the commission that is paid to the insurance SALESPERSON is also low. Has anyone ever encountered an insurance agent that recommended term insurance? Give me a break! I’m very certain, whether or not the agent was a friend or someone recommended them to you, that they insisted that a whole life or universal life policy was the way to go. Not only will you get the death benefit, there is also an investment component as well! They may have failed to mention that the commissions on these policies are some of the most lucrative commissions in any business; paid for BY YOU! Some “earn” as much as 90% of the first year’s premiums, as well as commissions every year you are paying premiums. Good business to get into to pad my pockets! If you currently have a whole life or universal life policy, please do yourself a favour and pull out everything you have on it. How much have you paid into the policy? How much is it worth now (cash value)? Did they insist that you only need to pay x amount for y amount of time and the investment returns will fund the rest for you? Did they also mention that if your policy does not hit the targeted return, that you are on the hook for the rest? Did they show you fancy charts on how your premiums would grow? Were you able to look at that chart and figure out what the worst case scenario was (ie, if you had to pay the premiums for the rest of your life, what would that equate to?) The more complicated the policy, the more you are paying the agent, the insurance company, and the actuaries to calculate what the premium should be. I assure you everyone is getting their piece of the pie, and it’s all on your dime.

I would ❤ to sit down with you and your policy and go over the details if you want. The best exercise you can do is figure out how much you have paid into it, and then call up your agent and ask how much you are going to get back if you cancel today. The difference has gone into other peoples’ pockets. It might be best to just cut your losses, cancel the policy, purchase the similar amount of coverage under a term policy, and invest the difference in the premiums towards your retirement. Your future self will thank you!

I need your help! As this is a new blog, please spread the word on facebook or twitter! The more the merrier!

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