I’ve made a lot of money mistakes over the years. One of my biggest regrets was getting in over my head as a first time home buyer.
It was 2003 and, although the real estate market had been stagnant for years, the Alberta housing boom was about to begin.
Getting in over my head
The house I had lived in for the previous five years – co-signed with my parents when I was a University student – had just been sold and, after paying off a good chunk of my student loans, I was left with about $18,000 for a down payment on a new place.
My girlfriend (now wife) and I went house hunting and found the perfect starter home. It was a brand new, 2-bedroom, 1-bathroom, 4-level split house that was a month from completion.
It came with a huge backyard, and the 3rd level gave us some extra living space that we hadn’t found in the other homes in our price range.
The market was starting to pick up; the builder incentives to include all the kitchen appliances, window coverings, and a tree for the front yard was pulled off the table a few weeks before we closed.
Related: 4 Advantages Of Building A House
I decided to buy the place and agreed to the asking price of $129,900. That was only $100 less than what I was pre-approved for by the bank – talk about stretching to the limit.
In fact I was stretched much further because, at the time, I was only making $32,000 as a hotel sales manager in my first year out of school.
My girlfriend would move in and we decided to get another roommate to help pay the bills.
I only put 10% down, which meant I had to pay CMHC fees. That added another $2,500 to the mortgage.
New appliances, window coverings and landscaping ate up the rest of my savings. I was tapped-out by the time we moved in.
Related: How Much House Can I Afford?
Negative Cash Flow
Having a roommate to kick-in $400 a month would help to hide the fact that I spent more than I earned.
When he left eight months later to go work on the family farm, I went from living paycheque-to-paycheque to being $400 a month short.
Instead of getting another roommate I decided that things would be fine. They weren’t.
I resorted to using credit cards to cover my cash flow shortage; taking out cash advances and running two cards right up to the limit.
In less than a year I had racked up $8,000 in credit card debt. Things were getting so bad that at one point I had skipped a credit card payment and then borrowed money from my boss to make it through the month.
To make matters worse, I thought I had reached a dead-end in my career. My direct supervisor (not the one I borrowed from) was incompetent and I felt she was holding me back from advancing my career.
Related: How A Career Change Improved My Life
Saved By A Lucky Break
At my lowest point, I broke down to my girlfriend and explained what was going on. We’d have to make some tough decisions to cut back on our spending or we’d have to sell the house.
It took a few months but we got back on track. We started a budget and cut back what we spent on groceries and dining out.
We managed to get our cash flow back to positive territory, but we were still living on the edge financially.
Then I caught a lucky break when my supervisor was let go and I was elevated to director of sales. The promotion came with a $10,000 raise, which gave us a ton of breathing room.
Now I could afford to pay more than just the minimum monthly payment on my credit cards. Still, at 19% interest, it was costing a small fortune to carry a high balance from month-to-month.
Related: 35 Ways To Save Money
I went to the bank and asked about a home equity line of credit. The house was worth $190,000 now and had $80,000 in equity.
I took out a $25,000 line of credit and used it to pay off my credit cards as well as the remainder of my student loans.
Final thoughts on home buying
While the federal government took steps to reign-in the hot housing market last summer, the banks will do anything to keep the party going.
A mortgage rate war has already begun as we head into the key Spring selling season.
First time home buyers should be cautious not to get lured in by ultra-low interest rates.
Housing prices a decade ago pale in comparison to today’s over-inflated real estate market. But the lessons learned from my home buying experience remain the same.
My biggest home buying regrets were:
- Borrowing the maximum I was approved for by the bank
- Depleting my savings on closing costs and furnishings
- Not doing a proper monthly budget
- Underestimating how much I’d rely on renting out a room for income
- Overestimating my own income and opportunity for promotion
I was extremely fortunate to get a promotion and have my home rise in value at the right time when I needed help.
Related: Our Fast Track To Financial Freedom
But with wages flat and real estate prices falling, I’m afraid it won’t end as well for home buyers who get in over their heads this time.
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“Because it has become increasingly difficult for individuals to build their own security single-handed, government must now step in and help them lay the foundation stones.” – Franklin Roosevelt
You may be worried about your retirement finances – or feeling pretty good about them. Regardless of your personal situation, you know from ongoing media coverage that many workers are concerned about being adequately financially prepared for retirement.
Same themes, over and over again
Employer defined benefit pension plans have become a rarity. People haven’t been saving enough personally and are carrying too much debt.
They aren’t confident about how to invest. They are worried about the future.
The news stories seldom provide any insight or ideas for possible solutions. However, a recent Globe and Mail article featured CIBC CEO Gerry McCaughey’s ideas on CPP reform.
He states that Canadians should be allowed to make voluntary contributions over and above what they already pay through payroll deductions.
Related: Why Baby Boomers Aren’t Prepared For Retirement
This would ensure a forced savings – with no withdrawals allowed – in order to get a secure, predictable lifetime payout on retirement.
Voluntary contributions?
We already have voluntary savings plans in place – RRSPs, TFSAs – that the majority of Canadians are not fully utilizing.
24% of eligible tax filers contributed to an RRSP in 2011 with a median contribution of only $2,830.
The numbers are equally dismal for TFSA use, with only 23% owning a plan in 2010.
Related: Using Tax Free Savings Accounts In Retirement
The problem with optional plans is – well, they’re optional.
Those people in low and medium income brackets are the least likely to participate in any of these retirement plans, and they are the ones who have the least financial security.
For some of those with plans their savings are insufficient for retirement income and are unlikely to last for twenty or thirty (or more) years.
A legitimate pyramid scheme
A pyramid scheme is a financial arrangement in which a small number of early members receive payment from a larger number of later members.
The schemes collapse, because they can’t recruit enough new members at the bottom to make payments to the old members at the top. They are unsustainable.
Related: Learn From Baby Boomer Mistakes
CPP originally was set up as a “pay-as-you-go” approach, meaning that the current workers’ contributions that are going in are used to pay the retired workers’ benefits that are paid out.
The goal was to provide a safety net for a few years and is funded by equal contributions from workers and their employers, out of everyone’s paychecks.
But the ratio of workers paying into the system has fallen in comparison to the number of retirees collecting benefits.
A lower birth rate means fewer workers paying in. An increasing life span means people are taking longer and longer to kick the bucket.
A small number of old people were like the early pyramid members at the top, and a large number of workers were like the later members at the bottom.
This retirement approach worked because it was relatively inexpensive per worker. It was also sustainable, because most people didn’t live to be that old.
Related: Are You Counting On An Inheritance?
But as people live longer and there are fewer workers, the top of the pyramid gets broader compared to the bottom. This has never happened before and changes to the system will have to be made as it will eventually become much more expensive per worker.
CPP Reform: A new approach
Every pensioner feels entitled to his or her monthly payment and looks forward to it. For many, it is their largest source of income.
Future recipients of that monthly payment feel just as entitled.
With the total contributions coming in shrinking in proportion to the total payments going out, we’ll need to either increase the contributions or reduce the benefits. Neither of these options will be popular.
Related: Is Our Old Age Security Program Sustainable?
Optional CPP contributions may be the answer, especially if one were able to “top-up” their contributions (as allowed by some company pension plans) to make up for any times of unemployment or low income.
It would be more palatable to know it’s for your own benefit, rather than paying for the retired old geezer down the block.
Would you be willing to increase your CPP payroll deductions to secure a larger pension payout that would last for the rest of your life?
Credit card companies try to get you to sign up for secondary products and services, often forms of insurance or new and convenient ways for you to get at your credit and use it.
These services are lucrative for the card issuers, but are not in your best interest.
Here are three credit card products you should avoid:
Credit Alert Monitoring
One regular pitch is for credit alert monitoring that helps protect against identity theft. The service costs upwards of $17.99 per month and includes online access to your credit report and credit score from Equifax Canada.
The service claims to proactively monitor, manage and protect your credit and identity information and can detect early signs of fraudulent activity.
Many credit card issuers offer this service, as do the credit bureaus – Equifax and TransUnion.
Credit alert monitoring is expensive and unnecessary. You can get a free copy of your credit report once a year and you can get instant access to your credit report and credit score online for less than $25.
Balance protection insurance
Another frequently marketed product from credit card issuers is balance protection insurance.
For a cost of 99 cents per $100 of the average daily balance you can protect your credit rating against unexpected job loss or disability.
Related: Best Balance Transfer Credit Cards In Canada
You might willingly agree to add this protection to your credit card thinking that because you pay your balance in full each month you’ll avoid the fee. Not so.
The fee is based on the amount owing on your statement due date, or on your average daily balance, depending on the card issuer.
Balance protection insurance should be avoided. Just like with mortgage life insurance, this product is aggressively marketed to unsuspecting customers.
You’re much better off keeping a small emergency fund and having proper term life insurance and disability insurance.
Access cheques
Most credit card issuers like to send out access cheques hoping you’ll use them to pay off balances from other credit cards or that you’ll find some other use for the cash.
The marketing material I’ve seen suggests you can use the access cheques for:
- Visiting friends and family – create some memories that will last a lifetime.
- Holiday shopping – the people you care about deserve the best.
- Planning a summer getaway – you work hard; treat yourself and your family to a holiday
Sounds like a bad idea. The annual interest rate for access cheque balances is around 19.99%.
Related: Why A Mortgage Payment Vacation Is A Bad Idea
The transaction fee for access cheques is 1% of each transaction amount, with a minimum fee of $7.50.
Final Thoughts
Credit card issuers prey on unsuspecting customers by aggressively promoting products that aren’t in your best interest.
Whether you diligently pay off your credit card or you carry a balance from month-to-month, you should avoid these credit card products at all costs.
If you’ve been misled into buying something like credit alert monitoring or balance protection insurance, call your credit card issuer and cancel it immediately.
- Check out this CBC Marketplace report – Is credit balance insurance worthwhile?
When used responsibly, credit cards are a good financial tool that can help you budget effectively, manage your cash-flow, and earn rewards.
Related: Top Cash Back Credit Cards In Canada
Just make sure you don’t fall into the credit trap. Pay off your balance each month and beware of sales pitches for products you don’t need.