Pop Quiz part 4

The opportunities  are wide open

Here is the answer to the last question; how much disposable income do you have?

It’s straight forward.  Remember…… net income is the amount you bring home.  Disposable income is net income, minus all the fixed bills. In most cases this would include:

·         Rent/mortgage

·         Property taxes

·         Utilities … just the basic ones not the cell and internet

·         Car insurance and car payments... if you have one

·         Medical insurance/life insurance… if you have them

·         Other fixed payments you may have

Once these fixed bills are paid, the remaining balance is disposable income.  From this disposable income, you should plan to save between 10-15% of your net income for retirement.  

For example:

If your net income is $2000, and your disposable income after paying the fixed bills is $1200, plan to save $200-$300.  You then live off the remaining $900-$1000. This should cover food, clothing, gas, entertainment, internet, cell, medical expenses, vacations and other things that may occur.

Now you know the difference between gross income, net income and disposable income. You will want to know all three of yours - they will tell you how well you are doing at staying on budget.

Pop Quiz – Part 3

The third question in the quiz was, “When will your mortgage be paid off, if you have one?”

Again, great if you know the answer.  Many of us do not, and this can lead to trouble.  The date of your last mortgage payment becomes important as you draw near to retirement.  If you still have to make mortgage payments in retirement, your monthly income will have to be higher than if you do not. Alternatively, your plan may be to downsize, which is a good idea.  However, with more people aging, the price of smaller homes may be more than the equity in your current home. Rather than downsizing, you could spend a little money and renovate your current home to include a suite.  This would help with mortgage payments in retirement. 

Many of us get caught in the trap of extending the amortization in order to have lower payments.  Other people believe that we should not pay off the mortgage, but use the equity for other investments.

Whatever your opinion, know where the end is so you can plan for retirement.  Look forward to the date when you can burn that mortgage!

Pop Quiz.... Part 2

Question two of the last post was, “Do you know the interest rate of all your credit cards and Lines of Credit?”

Congratulations if you answered “yes”! These interest rates tell us which cards to get rid of, which to pay off first, and which to keep.

Interest on department store credit cards can run from 21-28%. Ouch!  If you have one, clear it off and get rid of it. Many stores have “interest free” offers, if an item is purchased using their credit card. This is only a benefit if there is no administration fee, and the balance is paid in full within the specified time. I recently bought an appliance this way.   When I asked about an administration fee for 12 months interest free, I was told it was one percent.  Not much, but still an additional charge.  There was no administration fee for three months interest free, and this is the offer I agreed to.  I paid off the account within the three months, and got rid of the card.

Bank credit cards range in interest from 9-19%.  Some have annual fees and some do not. The annual fee is worthwhile if it reduces the interest rate, but ideally - pay the account in full each month. I believe it is important to have a bank credit card - just use it wisely.

A Line of Credit (LOC) can be secured or unsecured, and can range in interest from prime to 8%. An unsecured LOC is a higher risk, and therefore has a higher interest rate. A LOC secured against your house can have a lower interest rate, but remember - every time the balance increases, the bank owns more of your house!

When using credit, ask, “What is it really costing me?”

Pop Quiz

1.      What is current net income per month? An average will do it fluctuates.

2.      What is the interest on all of your credit cards and line of credit?

3.      When will your mortgage be paid off in full, if you have one?

4.      How much disposable income do you have?

So how did you do? Could you answer them all? What is the benefit of knowing the answers to  these question? These are at the core of understanding you financial situation. You need to know how much you make and what you owe before you can start to make any headway with your money.

Your net income is everything that is left after all of the deductions are taken off of your pay. This will include such things as, EI, CPP, taxes; in some cases this may include health benefit contributions, pension plan contributions, stock options, and donations. Take a look at you pay stub.  There are other deductions but these are the most common. If you work as a contractor none of these will be deducted and it is recommended that you set aside 20% of each pay cheque to cover the basics. If you are self-employed the same rule applies.

Knowing your net income will help you determine if you are living within your means. You need to strive to not spend more that you earn.

If you do not know the answer to these question now is your chance to learn. I will answer the next 3 question in the next 3 blogs.

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Using credit to pay monthly bills

 Relying on credit cards to pay your monthly bills is a form credit card abuse (or misuse) and a good indicator of future financial trouble. Using credit to pay your anticipated monthly expenses is particularly dangerous if you are close to the card’s limit and making only minimum payments.  If this is the case, you will very quickly come a point where you have used up all your credit: a serious situation, since you will now be on the hook for higher monthly debt payments as well as your regular expenses.  Unpaid amounts on high interest cards can grow exponentially and overwhelm your resources. If you are here right now, you need to address the problem as quickly as you can, with either increased income or reduced spending. 

Reducing your spending:  This involves prioritizing your expenses and cutting out all non- essentials.  Which expenses are essential to survival?  Rent (or mortgage), utilities, medical costs, basic food and basic transportation costs (think: park the car.) Believe it or not, you can survive without spending on entertainment, restaurant meals and clothing while you are clearing up your debt.

Paying down a credit card may be challenging, and if you must choose between putting food on your table and paying your credit balance, by all means buy food: but cut back on non-essential spending. You do not need to pay for television, gym memberships or eating out. Your grocery list should include healthy basics, not prepackaged or extravagant items. You can also cut out alcohol and cigarettes if these habits are part of your spending. Letting go of things you want but don’t need will keep a roof over your head and food in your belly. It will free you from ongoing credit interest obligations and allow you to keep more of your earnings in the future. 

This debt reduction strategy may seem like nasty medicine but it is far better than the alternative, which is bankruptcy. The lights at the end of the tunnel will get brighter and stronger as you take control of your financial situation.  

While you are in debt-reduction mode (consider no TV, computer or cell) you may find you have time to make some extra money and /or work on important relationships. Remember freedom comes when financial stress goes away.