A Personal Spending Surplus ?

Before the previous Federal Election, the Tories claimed they had a “surplus” I read over the Annual Financial Report of the Government of Canada Fiscal Year 2014–2015 is the statement of the National Debt and saw that one of the ways a surplus was possible in the fiscal year 2014-15 was by ministries delaying spending, which made me wonder if it would be possible to do the same thing with our own personal finances?

Debt Subliminal

This is NOT a Debt Reduction Plan

Suppose we look at a young family, with a Home Line of Credit which holds the debt on their house (as opposed to a regular mortgage, this is an important part of my scenario). This young family goes to a financial planner, who tells them they needed to cut down on their spending and get to a point where what they spend is less than what they earn (similar to the concept of this government’s surplus).

The family is lucky in that their Home Line of Credit’s minimum payment is the Interest Charge for that Month (and luckily their Line of Credit interest rate is nice and low). The young family does have a lot of expenses, with small children, car payments and a large amount of discretionary spending (and the debt that accrued because of that spending). The family decides the best way to reach the zen of spending less than they earn is by not paying down their largest debt (their house), so that they can pay for all of their other spending (cars, vacations, nice clothes, cable, etc.,).

This idea actually works well (assuming the bank doesn’t call the line of credit and ask for all of their money), in that the family is not spending more than they make, but there is a problem. Their debt load isn’t actually dropping, and they will eventually have to pay down the debt on their house, which is a huge problem. An even bigger problem will be when interest rates go up, so in the end, this family is living in a financial fool’s paradise.

At the end of it, the Tories “surplus” didn’t really come to fruition, and thanks to a new Government, we are back to deficit financing programs and such, but there are promises of balancing a budget some time soon. This might well be how our example family ends up as well (i.e. much farther in debt).

Remember as I always say, Hey we got extra money, let’s spend it! (No, I don’t I am being sarcastic).

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Another Quarter Richer but Deeper in Debt

You could sing that title to the tune of Tennessee Ernie Ford’s 16 Tons, but Stats Canada published another interesting and information filled report that the main stream media is howling about how Canadians is going to be foreclosed (on). (report National balance sheet and financial flow accounts, fourth quarter 2015)

Sixteen Tons

Tennessee Ernie’s Greatest Hits
from Amazon

The report itself has a great deal of useful information about the Valuation (for lack of a better term) of Canada and Canadians, and well worth having a read.

The major line in one of the tables that is being touted as the reason that Canadians are going too far into debt. While these numbers are quite sobering in that the percentage of Debt to Disposable income is increasing and it is currently at 168% (i.e. for every $1 of disposable income, Canadians owe $1.68), however in another part of the report you can read:

On a per capita basis, household net worth was $263,200, up 1.5% from the previous quarter.

Thus my statement that we are Richer and also more in debt.

Quarterly Table of Debt and Income Comparisons
   3rd Q 2014 4th Q 2014 1st Q 2015 2nd Q 2015 3rd Q 2015 4th Q  2015
% % % % % %
Household sector
Debt to disposable income† 165.07 165.23 163.87 165.14 166.61 167.60
Credit market debt to disposable income 162.75 163.00 161.61 162.96 164.46 165.44
Consumer credit and mortgage liabilities to disposable income 155.36 155.59 154.20 155.50 156.99 157.96

What the ratio tells us: This ratio compares debt to annual household disposable income. In general, the ratio suggests that the lower the ratio the greater the ability to manage debt through current income.” 

The simplistic explanation overall is that Canadian assets have been increasing in value, with the housing bubble (in many areas, not Alberta though), the recovering stock market and the recovering loony as well. Are we actually saving more? I doubt it, I do believe that we are further in debt though (so yes I am agreeing with many financial pundits who are sounding warnings from this data).

The fact that debt is increasing vs. our disposable income is a more sinister issue. Are we simply deluding ourselves that since we are saving, we can also still build up more debt?

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Debt Cash Grabs and Your Bank

A while ago, Gail Vaz-Oxlade put out a simple Facebook post that blew my mind.

I had heard this could happen, but evidently it happens a great deal, when folks build up large debts, or get too delinquent with their debts. The terms of your banking agreements make this all legitimate (so read them over closely to see what other interesting things your bank can do, I am sure there are others), but it does seem interesting that banks want you to consolidate your banking in one bank, and they will entice you to do this with great “deals” on things.

Customer Retention

Don’t put all your eggs in this one mousetrap

Does this mean you should go out and diversify your assets and your debts so that they are at least arm’s length away from each other? Might not be a bad idea, if you are the kind of person that builds up large personal debt loads and is very likely not to pay those debts back (or has a tardiness streak in you), but then again, if you were that kind of person, would you think of this?

It seems there are folks who try to game the system, and will bounce around from bank to bank attempting to stay one step ahead of debtors prison (or the bill collectors), but I haven’t met many of those folks. Is your bank suddenly garnishing your money a real concern? Not for most folks, but it is something you should keep in mind, just like if you buy your lottery tickets with a credit card, it is treated like a cash advance.

File this one in your TIL file (Today I Learned).

 

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Optimize Your Budget for Any Debt Level

You’re not going to believe the trick I use while budgeting to pay down my debt load.

Optimized Budget

Your Budget Will Be Optimized

This may solve your debt problems simply and if you want to know how it works, click below.

👀 Click here if you want to find out this amazing trick 👀

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Financial Hauntings

Do you realize that you drag your financial past decisions around like Jacob Marley did in a Christmas Carol ? All of those odd decisions that you made in the past build a chain that you are now hobbled with, and will continue to be hobbled with. Dickens had Marley’s chain signify the horrible decisions he made about mankind, and while that is a lovely sentiment, the financial chain that you create for yourself here and now is just as crippling (if you continue to make bad decisions).

Jacob Marley

Jacob Marley and his Chains (Sir Alec Guiness)

Getting the point across to younger folks, that pretty much all the odd decisions that they make early on in life will follow them one way or another, in pretty much all aspects of life, but especially in financial terms, is not an easy task. When you are young you have all the time in the world, and if you make a few mistakes it won’t caused you any issues later in life, or will it?

  • If you decide to forego putting money in your RRSP, and decide to get a nicer car when you were 25, you then have more links in your financial chain to carry. You will have to save more later in life to retire the way you wish.
  • If you don’t quit smoking until you are 40, you have 20 years of spending money on your habit, and shortening your life (and paying more for your life insurance as well). More links in your financial chain. You might want to look up how much term insurance costs for a smoker over the age of 50, if you think I am being alarmist.
  • Every debt that you think you will pay off at a later date, or worse each month you carry credit card debt, you forge many more strong links in your financial chain.
  • Every lottery ticket that you have bought over the years adds more links to your chain.

The financial chains you forge in your youth, are a heavy weight to carry into your golden years.

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