Gordon Stein, Author at Cashflow Cookbook

Household January 21, 2021

How to Eliminate Holiday Debt

It’s the start of a new year, marked by some timeless traditions. Some of us drag out Christmas trees to the curb, others dismantle and box our Festivus poles while others pack up menorahs or kinaras. There are lights to be stowed, pine needles to vacuum and gifts to be worn, hidden, stowed, drank, returned or re-gifted. But after the cat eats the last piece of tinsel and the final unloved morsel of fruitcake is tossed, comes the hard part. How to eliminate holiday debt?

So unforgiving, that bold black text on crisp white statement. And the totals, so clearly inflated. There must be a mistake or five here. Then starts the questions and or blamings, “what was that $312.54 for?” or, “honey did you buy something from JBM Trading Company 412?”. Often there is a surprise bill or two that arrives around the same time, some medical test invoices, the annual property tax bill, or some school fees for the kids.

It all adds up to, well, more than you have in your checking account. What to do? With credit card interest at 20-30%, compounded monthly, getting rid of this debt is a 5-alarm blaze. And paying the minimum amount due is a ticket to the start of a financial apocalypse. It needs to go. All of it.

How bad is this thing?

Start by surveying the damage. Get it all out there. The paper statements, the online balances, the main credit cards and the branded store ones. And yes, even the “I only got it to get that in-store discount on that one big thing that you swore that you would never use again”, cards. Add it all up. Make up a quick table of the cards, the balances, the interest rates and the due dates. Not pretty, but at least it is all out in the open. Involve your partner in the process. Work out a plan to pay them all off. Missing due dates can lead to credit score issues, delaying the ones with the highest interest rates are costly. Work out the priorities and make a plan.

Remember the pain of all of this, since you will need that for next year’s planning.

What is the funding gap?

What do you owe and what funds do you have available? Identify how big the gap is. That is a key first step to solve the issue. Take a look at timing, when are the next paychecks coming in and which bills are due when.

Let’s pay things off

The first few moves are obvious, using available cash to pay pressing bills, but then it gets trickier – how to fund the bills that have, well, no funding. Here is a list of key action moves:

Do you have government Covid checks coming your way? Is there any action to get them sooner? Can you register online or otherwise speed up their arrival?
If you are expecting a tax refund, can you get your return filed sooner to access that cash?
Are there other bills that will let you delay payments or reduce payments without penalty? Call them and see if they can help you.
What about that $1,200 you lent your brother-in-law? Might now be the time to collect?
Is there some part time work that you could do to get some extra cash? Overtime at work, some Uber or Lyft driving, some retail shifts or some online tutoring? Can your partner help?
Are there some gifts that you don’t like, don’t need or could live without? Try returning them for cash refund. As a minimum, could you return them for a store credit, then sell that online? Or use the credit for essentials that would otherwise need to be paid?
Anything else around the house that you could sell on ebay, craigslist or offerup? As an example, maybe you are now a smartwatch devotee and no longer need some dress watches.
What changes can you make to reduce your usual monthly spend and free up cash for the bills? Going vegan for a month, reducing take out and drive through food, turning down the thermostat and of course curbing new purchases can all help. Check out my other blog posts or Cashflow Cookbook for more ideas.
It’s not ideal, but it might make sense to temporarily reduce payroll or other automatic savings provisions for 401ks, RSPs, company stock plans etc. to free up cash and pay off bills. Not a good long-term solution, but sacrificing a return of, say 7%-10% to pay off bills with an interest rate of 22% has some logic.
Try calling the credit card companies. Explain that you are willing to do your best to pay, but you are overwhelmed with holiday bills and are wondering what they might be able to do to help. Worth a try.
A final option is to take out a loan or use a line of credit to consolidate the bills and pay them off. Line of credit interest can be as low as 3 or 4%. The danger of course, is to take out one of these loans and then let your credit card balances creep up.

How to Eliminate Holiday Debt for Next Year

Of course, the best way to solve this problem is to never have it in the first place. Now that we have solved your current year problem, let’s start now to set you up right for the new year.

Once you pay off your cards, call and cancel all but one. That’s all you need. Multiple cards are damaging to your credit score, make it easier to ring up more debt, complicate your monthly bill payment and record keeping processes and lead to more spending. Oh, and make your wallet fatter. The freebies and extra discounts from these cards don’t save you money, they just encourage more spending. One good reward card. You got this!
If you are sweating your holiday debt, so are the rest of your family and friends. Now is the time to set an agreement that limits holiday gift value to an agreed amount. Start a family discussion, be candid and get it done. Whew!
Or go a step further and switch to cashless gifts. Why not give vouchers to make a meal, do some house projects, kitchen cleanups, car washes or other services? A backrub for your partner? Or even promises for time together for a picnic or a hike?
If the spending can’t change, then at least plan for it and save up. If holiday spending is, say, $1,000, then set aside $83.33 a month into a holiday gift account. Lots of banks now have set ups to let you save for a few different goals. Or just stash the cash somewhere.
Pre plan your shopping so that you establish limits for each recipient and stick with them. Plan the gifts too so you can watch for sales, Groupon deals or discount coupons.

Hopefully that will set you on the right course and eliminate some financial stress. What other ideas do you have to help with holiday spending and debt? Let me know in the comments.

All the best to all of you for a wonderful 2021.

Gordon

photo credit Freestocks at Unsplash

Financial March 6, 2020

How to Stay Calm as the Coronavirus Infects your Investments

Have you summoned up the courage to check your investment returns? Overcome by the temptation to sell it all in case we face a Hollywood-style dystopian future? Or do you have some new money to invest and are terrified that it may get swallowed up by the Coronavirus, leaving you broke. In short, how to stay calm as the Coronavirus infects your investments?

Let’s take stock. Of stocks. Over time. Back in January 1985, I was a fresh grad of Western University, with my first real time job, a full head of hair and some leftover muscles from my time in the college weight room. The Down Jones Index (a measure of the US stock market’s largest companies) stood at 1,286.77. It was a precarious time to invest since it was right after the 1981 recession. People lost homes. Jobs were scarce. But fast forward to today (March 6, 2020) and most of my hair and muscles are gone. But the Dow Jones index has risen to 25,701. If you held on to your investments since 1985 you would have seen an annual compound growth rate of 8.92%. Not bad! And that includes the big Coronavirus drop. Even better, your returns would have been bolstered by another 2% in dividends.

Key learnings about investing through a crisis

This long term growth happened despite the 1987 Black Monday crash that caused a drop of 33%, the dot com bubble of 2000-2002, the 9/11 tragedy and the 2008 financial crisis. In hindsight, they were all great buying opportunities, but at the time, they all felt like armageddon. This is the first time the Coronavirus is infecting your investments, but lots of other crises have taken a bite. Looking back, there are some key lessons to be learned:

Stock markets can look scary in the short term. Here is the view of the Dow index as the Coronavirus fears hit:
Dow Jones Index during the Coronavirus crisis

Ouch! Thats a big drop. And the red color adds to the sense of panic. Makes you want to sell and get out until the carnage is done. But here is a view of the same stock market index over the longer term. Almost hard to find those same crises as this collection of companies continue to grow their businesses over time.

long term view of the Dow Jones
The stock market is a long term investing vehicle. As Warren Buffet likes to say, “it is a device for transferring money from the impatient to the patient”. No one knows what it will do next week or next year, but over longer horizons it offers an opportunity to grow wealth. We know three things about crises: the current one will end, a new one will follow and through them all the patient investor enjoys long term wealth building. When I speak about financial wellness, audiences often ask how to attain returns of more than 2%. The answer is the stock market mixed with patience.
When you buy stocks you are buying a part of real companies that move oil, make cellphones, create software and haul things around. Think like an owner, because you are one. Don’t buy and sell on emotion and whim. By owning a company, you have employees selling things, making things, writing reports and fussing about new ways to make you money. As an investor, you get to relax and watch TV on the couch and let them do the work and bring you the rewards. Enjoy that process.
Invest in quality companies for the long haul, not hot tips from your work mate, hair dresser or the internet. The most speculative companies take a beating in a crisis. Blue chip companies simply carry on producing profits. Pipelines, telcos, banks, insurance companies and stable, on-trend technology companies can be great wealth producers over time.
Include dividend stocks in your portfolio. The steady stream of dividends provide income if you need it, or they can be reinvested automatically (dividend reinvestment program or DRIP). DRIPS use the dividends to automatically buy more of the stock using the dividends. As a bonus, when stock prices drop, DRIPS automatically take advantage of the sale, buying more. Learn more about the beauty of dividend stocks here
Diversify by investment type and by geography. Having some bonds in your portfolio cushions the ride. Since the Coronavirus drop happened on Feb 12, 2020, my Vanguard bond fund (BND) is up about 3.5%. Not bad. It also pays a yield of 2.6%, so the cash rolls in even as markets falter. Canadians tend to have too much invested in Canada which is only about 3% of the world market. Branching out to US and international markets is important to reduce risk and build returns.
Vanguard BND fund performance
If you lack investing knowledge or are prone to acting on emotion, get an accredited financial advisor in between you and your money. The cost of their advice can pay for itself if they can prevent you from acting in a panic, buying on bad tips or selling during a crisis. They can also help with tax and estate planning and a host of other financial advice. Shop carefully, they are not all created equal.
When a crisis hits, like the current one, stay calm. Know that the companies you own will fall in value, but they will recover over the long term. Resist the urge to sell. Remember that no one rings a bell at a stock market low so that you know when to buy. And there is no buzzer that sounds at a peak warning us to sell. Accept that stock market gains and losses are part of the business of investing.

So how to stay calm as the Coronavirus infects your investments? Stop checking the value of your portfolio and trust the employees of all of those companies to continue to work hard and build you wealth. Stay in solid, well run companies and invest for the long run. Oh, and wash your hands!

To find ways to free up more cash to invest, have a look here.

Photo credit Ani Kolleshi at Unsplash.

Financial August 1, 2019

The Simple First Step to Build Wealth

Yes, you can start today!

One of the most common questions I get during speaking engagements is about how to get started. What can they do today? In other words, is there a simple first step to build wealth?

Often I ask my audience is to think about their current wealth – the difference between what they own and what they owe. Their faces give them away. It is clear that most of them have never thought about that number. They know the amount of their pay check, and some of them know the value of their debts or some of the things they own. But they haven’t put it together to know their actual wealth. Wealth is often called net worth, but many would take the position that our net worth is more than just the sum of our finances. So let’s call the number our Wealth Number.

There are lots of numbers to look at…

When people talk about getting rich, sometimes they talk about the stock market and spend time watching it go up and down. Often every few minutes on their smartphone, leading to unnecessary mood swings. Others set up a budget and try to track expenses, leading to spirited spousal arguments about who caused the biggest budgetary miss, or can one partner claim a credit for the savings from a 1/2 price beer and wing night? (answer: no) Some focus on paying down a debt, even as new debts spring up like bad weeds. As a result, they build frustration, not wealth.

While all of these numbers can be helpful, the most important is your overall wealth number. The difference of what you own minus what you owe. To calculate it, set up a simple table with everything you own at the top. Include things with real value, like a house, cottage, car and registered investments like an IRA, 401(k) or a 529 Education Savings Plan (or TFSA, RSP and RESP for my Canadian friends). Add up everything you own. Then make a section below that for everything you owe. Mortgages, student loans, car loans, and the line of credit you took out to pay for the dog’s new hip. Sum up the debts, everything you owe. Finally, subtract what you owe from what you own. This is your Wealth Number. You can do this on a cocktail napkin, in a spreadsheet or download the Net Worth Tracking Sheet here.

OK I have a wealth number, so what?

That number is a simple first step to building wealth. Why? What does the number mean? It is a measure of your financial wellness. Once it is big enough, your money can make enough money to take care of you. How fun is that? If the number is small, you may have a lot of debts that are cancelling out the value of the things you own. The monthly interest costs of those debts are pulling you backwards. If the things you own, like real estate and investments are growing, they are pulling you forward and helping you to build wealth. Sometimes people face a negative wealth number. Their debts overwhelm what they own. They need to work hard just to cover the interest on all their debts. Not fun, but solvable, read on.

What gets really interesting is tracking that wealth number each month to see what it is doing. If it is rising, you are moving in a great direction. If it is stagnating, or worse, declining you will be able to retire, well, never. Set up your cocktail napkin, envelope back or spreadsheet to track it every month and see what happens to it. Look as well at the sum of what you own. Is it rising? Awesome, how can you make it grow faster? Look at what you owe. Is it falling? Is there a way to pay things down faster? If you have an addictive personality, thinking about this will get your finances in shape just like your Fitbit or Apple Watch force you to get moving on your health.

Tracking your wealth number changes everything

Your wealth number is the simple first step to building wealth since it changes the way you think about money. The act of calculating it every month helps you build awareness of whether your wealth is actually growing. Updating it will take about 30 minutes a month using your paper or online statements. You got this.

Tracking your wealth number makes you start to think about the things you own:

Are my investments growing?
Am I getting value for the investing fees that I am paying?
Can I own more investments that will grow and build my wealth?
Have I bought a lot of things like cars, clothes and dinners out that lose value and lower my wealth?
Are there ways of lowering costs on the expenses that I pay for every month?
Can I use that freed up money to invest and build more wealth?

It also makes you think about what you owe:

Can I find more savings and use that cash to pay down debts more quickly?
What are the interest rates of all of my debts and which ones should I pay down first?
Have I been borrowing money to buy things that go down in value? (a double threat since the thing loses value every month, and lowers what you own, but the interest costs slow down your ability to lower what you owe)

Show me an example

Here is an example of tracking wealth. Interesting to lay it all out there. Be brave, you can do this at home. Looking at the green section, the house and 401(k) are moving up nicely, while the two vehicles are losing value each month (I depreciated them at 15% annually). Still the Total Owned is rising and slowly building wealth. Unfortunately, rising credit card debt in the orange section is working against the pay down of the mortgage and the car loan, as a result, the Total Owed is staying about the same and wealth is rising only slowly each month. Depressing.

Let’s try making a few changes and see what happens:

In this case, we have increased the 401(k) contributions by $200 a month, which will cause it to accelerate its growth over time. On the credit cards, we have curtailed spending and paid down each card balance by $500 per month. As a result, this family’s wealth is now growing by more than $4,000 a month and will accelerate as the investments grow and debts shrink. Nice!

Wait, where did the money come from?

It came from getting smarter about monthly costs and aggressively reducing monthly recurring expenses using ideas from Cashflow Cookbook where I lay out ideas to reduce monthly expenses by up to $13,000 monthly with minimal effort and sacrifice and from my blog posts. Lots of other blogs have great ideas including Barry Choi’s Money We Have and the classic, Mr Money Mustache. Some of the savings come from being smarter about spending, sometimes its about learning the joy of having fewer things, letting the Jones pull ahead and staying out of malls. Once you start tracking your Wealth Number, you will begin to find lots of ways to reduce expenditures and apply the savings to building the investments you own and reducing what you owe.

Summary

To build wealth, start by tracking your wealth. To accelerate it, focus on ways to free up monthly cash flow and immediately use those savings to pay down debts (especially high interest ones) and increase investments. Over time, what you own will accelerate and what you owe will drop. Work becomes something you do for fulfillment, bills go on autopilot, stress dissolves and life is fun. Welcome to financial wellness.

Financial May 6, 2019

What to Do If You Can’t Make Your Car Payments

Usually, I write about about ideas to reduce monthly expenses to free up cash for paying down debt or increasing investments to build wealth and move to financial independence. For many people, there is a day-to-day struggle along that road where existing debt and payments can be an issue. Here is a guest post from the folks at LendEDU, a US-based site that lets you compare loan costs from multiple providers to reduce your interest expense.

Depending on where you live, your car may be a nice convenience, or it may be a critical possession. If you’re in the city or live near your work, you may be able to get by without a car. If you have a commute every morning and no access to public transportation, however, owning a car may be a necessity for you.

It’s fairly easy for those with moderate-to-good credit to get a car loan, but what happens if you lose your job or have some financial difficulty and can’t make your payment?

Not paying your car loan can affect your credit and maybe even your employment for years to come, so simply ignoring the payment obligation isn’t a valid option. There are, however, other options for you if you find yourself unable to make your payment—and you should check them out long before your credit is in trouble.

Options If You Can’t Afford Your Car Payment

Talk to Your Lender

Your first step if you think you won’t be able to make your payment is to talk to your lender. You’re not the only person who’s ever had financial trouble—whether it be for just one month or a longer-term situation—and lenders have lots of ways to help you. If you’re not making your payment, they’re not making money, so it’s in your lender’s best interest to make it possible for you to do so. They do this in several ways.

Loan Modification

Sometimes, depending on the lender, you may be able to do a loan modification, which means you and the lender agree on a repayment term change. Usually the object of a modification is to lower the monthly payment, which can help you keep your obligation.

The downside to a modification is that it may raise your interest rate—and that means even though you’re paying less per month, you’ll pay for a longer time. A longer term also means paying more over time.

Refinance

If your lender is not interested in a modification, they may be amenable to an auto loan refinance. This is when you take out a second loan, with new terms, that pays off the old loan. If you receive a higher interest rate or longer term when refinancing, you’ll likely pay more over time. If you need the help right now in the short term, however, it’s a valid option.

Deferment

Some lenders offer a one-month deferment, which means they allow you to skip a payment, which they tack on to the end of the loan. If you’re simply having a temporary financial shortage, this could be an option. Just keep in mind that if you do this, your loan term will be a bit longer—and your final payment will be more. If you do take advantage of this, you’ll want to make that “skipped” payment as soon as possible, in addition to your regularly scheduled payment.

Balance Transfer Credit Card

Another option is to get a balance transfer credit card with a 0% APR balance transfer offer. While doing this can give you a year to pay down the balance without also paying interest, keep in mind that if you can’t pay it off within the introductory period—usually 12 months—the interest rate will skyrocket back up, possibly to almost 25%. If you’re not careful, you could find yourself in an even worse position.

HELOC

If you own your home, a home equity line of credit could give you the money you need to get caught up on your loans, consolidate payments, and help you keep your car—all at a lower rate of interest than you may have with your car loan. Since the money comes from your home’s equity, the rates are generally better. Be aware, however, that because your home secures this line of credit, if you find yourself unable to make that payment, you could lose your home.

Trade Your Car in

Trading your vehicle in for something less expensive can also help if you’re unable to make your payments. The object here is to trade it in for another vehicle that is cheaper—and therefore will result in a smaller loan and lower payment.

Allow Someone Else to Assume the Loan

A few lenders allow loan assumption, or someone else taking over the payments on your loan. Most lenders prefer to do a new loan for the new buyer instead of them taking over your loan, but a loan assumption can be done in some cases. You can also make an agreement with someone who will make the payments to you, and then you turn around and pay the lender. This is a highly risky maneuver, however; if your other party decides not to pay, not only are you out of the payment, but you’re out of the car.

Sell the Car

If your car is in decent shape and not “upside down,” where you owe more on it than its Blue Book value, you may be able to sell the vehicle and use the money to pay off your loan. This is one of the better options—if you can get the full value of your loan in the sale. If not, you’re still on the hook for any remaining payments.

Repossession

If you’ve gone long enough without making payments, your lender will send someone (a “repo man”) to physically take your vehicle back on behalf of the lender, who then sells or auctions off your car. Any costs gained in the sale or auction are applied to your loan, and whatever is left—plus the costs of repossessing it to begin with—is passed back to you. If possible, don’t ever allow your car loan to get to that point.

Voluntary Repossession

This is mostly the same, except in a voluntary repo, you’re turning over your vehicle to the lender of your own accord. If you’re late on several payments, you may want to consider this option because it will save you the additional costs involved if the lender repossesses your vehicle.

Bottom Line

The best time to start looking at options is before your payment is late. If you even think you’ll have a problem making your payment, talk to your lender first. Have a plan in place for if you experience financial difficulties, and make sure you’re aware of all your options.

Read full article here: What to Do If You Can’t Make Your Car Payments

For thoughts on how to buy the perfect economical car, have a look here.

What are your thoughts on the costs of running a car and what to do if you can’t make the payments? Let me know in the comments.