Monthly Archives: September 2011

Odette Morin

Readers share strategies they’ve used to cut expenses and get out of debt.

Loved this so much I had to share this with you. Please read and get inspired.

How I became financially free: Readers share their secrets – from the Globeadvisor website. see credits below.

Readers share strategies they’ve used to cut expenses and get out of debt. With the economy softening and a recent survey indicating that more than half of Canadians are living paycheque to paycheque, saving… money is a timely topic.

I’ve reprinted some of the best responses here in condensed and edited form. The ideas may not strike you as revolutionary, but they prove that ordinary people can achieve financial freedom by following a few basic rules. Thanks to all who wrote in, and here’s hoping that someone out there benefits from the ideas presented here.

My wife and I have been married over 40 years and we can’t remember the last time that we had a balance on our credit cards. Carrying a balance has to be one of the single biggest mistakes that people make.

– Fred B.

When I want to buy some creature comfort or gadget, I force myself to cut down on another expense. For example, I plan on buying an iPhone soon, so I decided that to pay for it I’m going to cancel my cable and my land line phone.

Getting rid of cable may sound harsh, but hey, all Canadian broadcasters just went digital, so between my antenna and high-speed Internet I can pretty much get anything I want entertainment-wise anyway, and with an iPhone who needs a land line? I’m not cheap – one of my bikes is worth $6,000 – I just like spending money on things I value.

– Lloyd D., Ottawa

Have your savings automatically withdrawn from your bank account every month into an RRSP or a savings/investment account, and live below your means.

Far too many North Americans feel they need to have the big house, all the gadgets and all of the latest consumables. As a result, most are in debt to achieve this lifestyle. I live a modest but very comfortable lifestyle and am no less happy than the majority of people.

– Genevieve L., Toronto

Make your life smaller. I moved to a downtown condo, got rid of my car (I rent when I need a vehicle), but kept my parking space as it’s an appreciating asset and rent it out for rising income. I have a public transit pass, which is tax deductible, and walk whenever I can. I shop with a cart on weekends and find many bargains at open air markets. We plan meals ahead of time and my family of three eats very well for less than $100 a week. Making small sacrifices like skipping the pub after work, having coffee at home in the morning and brown bagging it for lunch can reduce day-to-day expenses dramatically. We still vacation and dress well, yet we’ve been able to save more and reduce debt on a regular basis despite our incomes being pretty much stagnant.

– Alan C., Toronto

I personally make double mortgage payments. When I had to replace my car I bought an eight-year-old, low-mileage four-cylinder. No payments, cheap insurance and great on gas. In the summer I set the air conditioner at about 25 C and winter heat at 20 C. I live a comfortable life knowing my MasterCard balance is zero, my son’s education is paid for and he has no debt. On weekends, when I’m having a few beers or wine, I’m not stressing about the bills coming next week.

– John D., Stoney Point, Ont.

We follow my wife’s rule of acquisition when we need something: Identify what we want, and then ask, can we get it free? Can we get it used? Can we get it at a discount? We stick our change in a jar, and when it’s full, we put it on our mortgage. This adds up more significantly than you’d think, maybe $500 to $750 a year in change, incredibly. We also buy a lot of things with cash. You sort of tend to retain cash; there is that physical angst of seeing your twenties broken into fives and toonies that you don’t seem to get with debit cards.

– Marty B., Ottawa

I biked to and from work all year long and vacationed in the off-season. I always paid bills on time. A car purchase was made with a $10,000 down payment on Visa (resulting in points), which I repaid with cash, and a zero interest loan for the balance. I have a very comfortable retirement fund that I can use for daily and extraordinary expenses. In 2011 I have taken four vacations so far and next week I am going on a six-week vacation to Europe. In my eyes I deserve it and I intend to enjoy the fruits of my “frugality.”

– Peter G.

Live close enough to where you work, or work close enough to where you live, and you won’t need a car. Food-wise, don’t buy what you can make yourself. Only eat out on special occasions. Remember that most movies aren’t so great that you can’t wait for them to appear on DVD at the public library.

– Eric D., Victoria

Wednesday, September 14, 2011
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Anthony Sabti

Will this Affect my Credit Rating?

The credit rating.  The dreaded credit rating.  Everyone has one, and it plays such an important role in our lives.  If you’ve ever applied for a new cell phone, credit card, limit increase, line of credit, bank loan, car financing, or a mortgage, then you most likely had to meet the lender’s credit score requirements in order to get approved. 

Each month, your lenders report to the credit bureaus whether you made your payment late or on time.  All that payment data is used to determine your credit score.  Your credit report keeps payment history for 7 years.

Some people believe that paying your bills on time is all you need to do to have a good score.  While payment history is a big factor in determining your credit score, it is not the only factor.  There are several components to your score and some carry more weight than others. 

Here is a list by order of importance of these components, along with some tips:

1.  Payment history – The most important factor
If you pay your bills on time; your score stays flat or maybe goes up.  If you don’t pay your bill on time, your score will go down. 

For credit cards, you need to make at least the minimum payment for it to count as an on-time payment.  If you routinely make late bill payments, I would suggest looking into whether you can setup automatic payments with the lender.  Usually, they offer a program where either the minimum payment of the full bill payment is automatically taken out of your bank account each month. 

Although the payment of your utility bills (i.e. electricity, phone, cable), is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which will negatively affect your score.

2.  Amount borrowed compared to available credit
Do you spend up to your limit each month on your credit card?  This will have a negative impact on your credit score. 

Avoid borrowing more than 50% of your available balance from any single lender, and ideally you want to borrow less than 33% of your available balances. 

3.  Length of Credit History
The longer you hold an account, the better.  Having accounts opened for 7 years will increase your score.  Avoid constantly closing and opening new credit cards.

4.  Inquiries and New Debt
Having your credit bureau report constantly pulled up for a new credit card application will have a negative bearing on your score.

If you know you’re applying for a mortgage soon, avoid applying for new credit cards in the weeks or months preceding your mortgage application.

5.  Type of Debt
Holding certain types of debt is better than others.  Car loans, and mortgages are called “installment debt” and are looked at more favorably than “revolving debt” such as credit cards and lines of credit. 

The first two items on the list each account for about 30-35% of your credit score and the next three account for about 10-15% each.  Your credit score is updated each month as new payment data becomes available. 

There are two major credit bureaus in Canada: Transunion & Equifax.  You have the right to obtain your credit report from both these companies.  You can usually obtain your credit bureau reports for free, and this will contain information about the various lenders you deal with and your payment history, but not your actual score.  If you want to obtain your credit bureau score, you will have to pay a fee (around $10-$20).

Anthony Sabti

Avoid Costly TFSA Mistakes!

Over the past couple weeks, CRA has mailed 103,000 letters to Canadian taxpayers penalizing them for over-contributing to their Tax-Free Savings Accounts (TFSA).  About 6.7 million Canadians have a TFSA, so this represents around 1.5% of all accounts.  Most of these penalties are the result of innocent mistakes where account holders simply didn’t know or understand the rules. 

We’ve all heard the basics of the program by now: It started in 2009, you can contribute $5,000 a year, any income and growth is tax sheltered, and the money can be withdrawn tax-free at anytime.

It all sounds pretty straight-forward.  However, certain assumptions have been made that have resulted in costly mistakes. 

By far, the most common and dangerous assumption with the TFSA is that you can take the money out and put it back in the same year.  This is not the case.  If you make a withdrawal, that contribution room does not get added back to your account until the following year.

For example, let’s say you had $10,000 in a TFSA on December 31st, 2010 (I’m ignoring any growth).  You then add another $5,000 on January 2nd, 2011 for a total of 15k (maximum room).  Something comes up and you withdraw $2,000 from your account in February, so now you have $13,000 in a TFSA.  Can you add back $2,000 at any point in 2011?  No you can not.  The $2,000 room does not get reapplied to your account until the following year (2012).  If you put $2,000 back in your TFSA at anytime during 2011, you will be over contributing.

How is the penalty assessed on an over contribution?  CRA takes the over contribution amount, multiplies it by the number of months you were over limit, and multiplies by 1%.  Using the above example, if you re-contribute the $2,000 to the TFSA in March 2011, that puts you 10 months over limit (March – December 2011). 

So, $2,000 x 10 months x 1% = $200!

That’s right, a $200 penalty, for a $2,000 over contribution over 10 months.  That’s pretty severe considering most Canadians are only using the TFSA as a high interest savings account, earning around a 1.5% interest rate annually. 

Here are some tips on how to avoid making a TFSA mistake:

1.  DO NOT use this account as a daily/monthly transfer in, transfer out type account.  We’re all used to transferring money from savings to chequing or vice versa with our financial institutions, but you simply cannot do this with a TFSA.  Put in $5,000 at the beginning of the year, and then forget about it.  That’s the best advice I can give you.

2. If you do make a withdrawal, remember that you only gain back that contribution room the following year.  Only use this account for withdrawals as a last resort.  It puts you in a situation where you have to make a note of not re-contributing until the next year. 

3.  Avoid having more than one TFSA account.  Do not open a TFSA high interest savings account, a TFSA investment account and a TFSA vacation fund account.  It makes keeping track of contributions and staying within your limits that much harder and may ultimately result in a mistake.

4.  If you want to transfer your TFSA from one institution to another, make sure to go through the proper transfer procedures.  Do not simply take out all your money from one TFSA, close the account, and place it in a new TFSA, not in the same year.  It’ll result in an over contribution.  There is paperwork you can fill out to transfer TFSA money in a way that doesn’t trigger a true withdrawal (it’s the same transfer paperwork used to transfer RRSPs from one institution to another).

5.  Work with whole numbers.  If you can’t contribute the full 5k at the beginning of the year, or if you have to withdraw some money, use a nice round figure: $500, $1000, $3000, etc.  It will make your job much easier in terms of tracking your contributions and staying within your limits. 

6.  Find out if you have a TFSA!  I’ve heard the same story several times where someone goes into their bank, the teller or account manager sees their normal savings account, and they’ll kindly suggest that the money can be placed in a TFSA where it can benefit from tax-sheltering.  The bank employee is only trying to help and doesn’t know that you may already have a TFSA (although they should ask).  The client will accept the advice of the bank employee, forgetting or not knowing that they already own a TFSA.  Find out if you have one, maybe your advisor or your spouse opened one for you and you forgot about it. 

Fortenately, CRA has announced that for a second consecutive year, they won’t penalize excess contributions to TFSAs in situations where taxpayers misunderstood the rules.  Of course, the onus will be on you to prove your case.  For those who have received a penalty letter, you know that you have to write a letter explaining your situation and to attach supporting documentation, and to send it to the TFSA Processing Unit address.

If you have recently received a letter, please contact us and we can look at it together.  If it was a situation where you misunderstood the TFSA rules, we can help you write a letter to CRA explaining your case and requesting “administrative relief”.  After that, we can only hope that CRA will be forgiving and waive your penalty.

Enjoy the long weekend!