Financial Tales Of Terror! II

Halloween is just around the corner and it's time for another installment of...

Financial Tales of Terror!

As Read By: The Librarian

(For those of you who have no idea who that is, watch this clip courtesy of Hillarious House of Frightenstein on You Tube here)

My first story is about a man who purchased a big ticket item to entertain his friends. What he didn't realize is that it ended up costing him his soul..savings! Muhahahah...*cough*cough*gasp*...  I call this one:

The Tale Of The Blind Sided Couch Potato

Rick couldn't wait to be the envy of his friends every Sunday. He finally found a good deal on a big screen TV he wanted from his local big box store. As he eagerly approached the sales counter, the clerk asked him if he wanted to sign up for store credit card and pay nothing for a whole year. "Hell yeah!", cheered Rick as he signed the dotted line without reading the fine print. As Rick was driving home he had a big grin on his face and thought of all the other toys he can buy with the $3000 he just saved himself from paying. Little did he know that boxed up TV was about to take him on a financial roller coaster of scary...things!

Sunday afternoon couldn't come fast enough and Rick invited all of his friends over to watch the game on his brand new big screen. "The best part is I don't have to pay for it for a whole year.", Chimed Rick. "Ooooh nice score bro", exclaimed his friends. As weeks went by, the luster of the new TV wore away and each Sunday came and passed. Summer turned to fall, and soon winter followed and time was running out for Rick to pay off his credit card purchase. "I have plenty of time to come up with the money", thought Rick. 

With a week left to pay for the TV, Rick went outside to start his vehicle to go to work. After turning the key, the engine whined and black smoke started coming out of his hood. "Your engine cratered and it's gonna cost $5000", explained the generic mechanic type character as he slammed down the hood on Rick's vehicle.

With his finances tapped out, Rick had no choice but to wait to pay off the TV so he could get his mode of transportation fixed.

A few months later Rick received a letter in the mail from the big box store from which he purchased the TV. As Rick began reading the letter his face turned white and the letter fell from his fingers and floated to the floor. Because Rick took longer than 12 months to pay for the TV, he was charged a full year of 30% interest on top of the original cost of the TV. His $3000 TV was now going to cost him $3900. So much for the good deal, Rick!

Wasn't that a terrifying story of high interest store credit!... No?... Well maybe this next one will scare the life out of you. I call this one:

The Tale Of The Never Ending Loan

Janet loved working at her retail job. She would get a employee discount so she would always spend her extra money on the newest clothes and instead of putting money into an emergency fund. Even though she saved money by using public transit and living with a roommate, she loved going to live shows or go on a night on the town with the girls. Life seemed good for Janet, but what she didn't realize is that life likes to throw a few curve balls to keep things interesting.

One day Janet came to work with her $6 Mocha Latte in hand, only to find out that the store was losing money so Janet had her hours reduced. "Not a biggie, I'll just find a part time job", said carefree Janet. After looking through the newspaper she realized times were tough, and there weren't a lot of jobs out there. When she returned home that night, her roommate was waiting for her with a look of concern on her face. "Umm, I forgot to tell you that we received a letter from our landlord a few months ago, and that our rent is going up in a few days," the roommate announced. For the first time in her life, Janet felt worried. What was she going to do? She needed more money and she needed it fast.

That night she went for a walk to calm her racing mind. Suddenly it started to pour rain and Janet did not have her umbrella so she dashed under a nearby canopy. As Janet collected herself in her newly found shelter, she noticed a green glow above her head. As she looked up she saw the words "Payday Loans" flash above her, calling out like a beacon of hope. "I've never noticed this place here before", she thought to herself as the ominous thunder roared in the background.

She entered through the door and heard the door chimes ring above here head. Just then a short little man popped up behind the counter. "Well hello there, how are you little lady?" chimed the short man. "Not so good. I'm a little short this month and could really use some cash right now," replied Janet as she approached the counter. "Would you like to borrow some money, then pay us back on you next payday?" asked the short man. Janet was so relieved to hear the good news that she nodded her head with excitement and the man pulled out a few pieces of paper. The short man had an even bigger grin on his face now and had Janet fill out the appropriate paperwork without reading all the details...yada yada...let me skip forward a little bit here.....Janet finally got home with the $600. She figured she'd ask for more money since the man was so nice and she deserved to buy some new clothes to make herself feel better.

Well when the rent was due, Janet had enough money to pay all her bills and buy that new outfit she had promised herself. When pay day rolled around she decided to stop by and pay back that nice man at the pay day loan store. When she opened the door the short man greeted her as usual and Janet approached the counter. The short man pulled out the contract, did some fancy calculations on his calculator and asked for a total amount of $690. "But I thought I owed you $600", cried Janet. The short man explained to her the outrageous interest rates that cash advance businesses are legally allowed to charge and the high risks they take to lend money. Janet looked confused and thought about how she would get the extra money. The ever smiling short man leaned in close and asked her, "Would you like to borrow some more money?" Janet thought to herself for a moment and said, "You know, I could use a new outfit". The short man laughed maniacally as he pulled out more paperwork and Janet smiled nervously as she unknowingly became trapped in a debt-cycle from...Hell!

Oh my goodness, wasn't that a very scary story of financial terror? It wasn't? Are you kidding me, I was absolutely terrified at all the wasted money. I don't think I'll be able to sleep anymore..... you.. you're laughing.

Curses! I thought these stories would scare the pants off of you. I'll have to come up with some even more terrifying tales of financial terror for next year. Until then, have a happy Halloween and good bye...for now.

TFSA- So Much More Then A Savings Account

Back in 2008 the federal government announced that there would be a new savings account that would allow your earnings to grow tax-free. I wasn't very excited at the time because you were only allowed to contribute $5000 and the highest interest rate the banks were offering were 2.5%. Little did I know in 2009 when I put $5000 in my shiny new TFSA that I was partaking in the most amazing savings vehicle every assembled....

If you haven't heard about tax free savings accounts yet then congratulations, you've made it out of your coma! This is a detailed account of what I've done with my TFSA. I'm sure there are better strategies out there but I spend a minimal amount of time on my tax-free trading account and it's doing very well.

Now I myself never realized the true potential that TFSAs offered back in 2009. I remember opening up a "savings" TFSA with my bank and they offered a 2.5% return. I kept my money in for almost a full year until I noticed that my interest rate of 2.5% was reduced to 1.5%. That was right around the time I started learning about dividend investing and then it hit me; if I opened a tax-free trading account, I could earn a lot more money without paying any tax.

The first business day of 2010 I transferred $10,000 into my newly created tax free trading account and purchased 200 shares of ENB. The next few days the stock price dropped and I thought the world was ending. My wife was furious with me but I fought the temptation to sell and naturally the stock recovered. Then one day in March my life changed forever; a dividend payment was deposited into my account for $85. A warm fuzzy feeling came over me when I made my money work for me instead of the other way around. From that day forward I became addicted to dividends.

By the end of 2010 the stock value in my tax free trading account increased by $1516 and I was paid $340 in dividends. That's a far cry from the $150 I would have been paid if it had still been in the crappy savings account from my bank. I noticed the interest rate from my original savings account was even further reduced to 1% while the yield in my tax free trading account increased from 3.5% to 4%. How did my yield increase while the banks were reducing their interest rates? It was all thanks to a little Christmas gift from Enbridge; they increased their dividend by 15% for March of 2011.

2011 was an interesting year for us. We had just purchased a new house and a lot of my funds were tied up paying two mortgages. I really wanted to contribute more money into my tax free trading account since the  contribution room increased by another $5000. I had 100 shares of BCE in a cash trading account that I bought in 2011 and I was paying taxes on the dividends. If I stuck shares of BCE in my tax-free trading account I would deem them sold and pay taxes on the capital gains. It would only be small amount, less than $50 to be precise so I went with it and added my BCE shares into my tax-free trading account. My yield increased from 4% to 5.7% and the total dividend coming in each year increased from $340 to $599.

October is almost over now, and after the market dips of August and September and a looming economic uncertainty, my tax-free trading account is still doing amazingly well. I deposited a total of $13000 and my trading account is currently worth $18,900. Sure beats the $390 I would have made in that damn savings account I first opened.

From here on in I plan to maximize my TFSA with any contribution room I have left. I also would like to get my wife's TFSA  maxed out as well, but that's not likely until her last student loan is paid off first. I will keep investing in quality Canadian blue chip stocks and re-invest the dividends to allow the maximum amount of compounding. I hope to get either a bank or some sort of consumer goods in my TFSA next, whichever gives the highest yield in the end. Hopefully when I plan to retire I will have created a self sufficient, tax-free income supply that will compliment my other retirement income. That is if the Federal government doesn't screw over my plan and change the TFSA rules on me.

What do you do with your TFSA?

RRSPs: Are They Really The Best Way To Save?

For the most part of my life I've been told that RRSPs are THE best way to save for retirement. Every year I would contribute whatever I could afford in order to get nice refund cheque from the government and would feel super rich depositing it into my account. Like thousands of other Canadians, I would delude myself into thinking it was free money when really it was my own hard earned cash!

The short term aspect of RRSPs seems like a win/win situation; you contribute money to your retirement, which lowers your annual income and the excess tax you've already paid is refunded to you. Since you're penalized for early withdraws from your RRSP called withholding taxes, it stops the urge to touch that money and allows it to compound tax-free. During the last few years of becoming financially aware, I've started to question if RRSPs truly are, "all that and a bag of chips".

The Long Claw Of The Government

Now I know everyone's situation is different with income levels, dependents and items to claim so the following information is from my perspective. My wife and I roughly make the same amount of money, and we just so happen to be in the middle of tax bracket. For us to contribute enough money to sneak into a lower tax bracket, we would both have to contribute fifteen thousand dollars to come away with a large return. That's a lot of money to sock away when it could be used for paying off the student loan and the mortgage. Not only is it a lot of money, it's locked away where it doesn't make financial sense to touch it. What happens if one of us gets sick or a major incident in our life requires us to need that money? We would lose a large sum of money in withholding taxes and we would lose that contribution room in our RRSP forever. It kind of makes it seem like your nest egg is kept on the highest mountain top and is guarded by giant eagle ready to claw away at your savings if you ever want to use it. I wonder if the eagle gets benefits and a federal pension?

Death And Taxes

Taxes have become a constant in life so unless you become a vagabond with no fixed address, you better get used to paying them. I for one hate paying taxes but they are a necessary evil. Some would argue it's better to postpone paying tax until you retire. That way when you aren't making any money your tax rate will be lower when you withdraw from your RRSP. While that does make sense, there is no way to tell what taxes will be like in the future. Sure there is a possibility that taxes will be the same or lower, but I subscribe to reality and have been around long enough to know nothing ever decreases. So technically by contributing to RRSPs you defer paying taxes now, only to pay less tax in the future which could essentially be a higher amount then they are now. I'm pretty sure the government gave a HUGE bonus to whoever invented RRSPs and developed the tax laws around it. Kind of makes you want to waive a white flag and live in the woods, doesn't it?

So Now What?

Apart from stuffing money in a mattress or hiring Tina Turner to be the mayor of my own tax-free barter town, the government will get their taxes either now or in the future. Are RRSPs the best retirement savings vehicle? Everyone will have a different opinion after weighing their own personal pros and cons. One thing is for certain; they do allow you to pay less tax when you are younger and have more expenses. Majority of retired people have little or no debt, so it may prove better to postpone paying as much tax now and letting your financially backed future self pick up the tab. If you can afford to max out your RRSP each year then good on ya. I am still going to contribute to my RRSPs, but I don't think I'm going to max them out. I'd rather spread my money out and maximize my TFSA and whittle away at my mortgage instead. In the end it's at least better to contribute something then nothing at all.

To my dozens of readers: What's your take on RRSPs?

Give Thanks Edition

I can tell by the rise of gasoline prices that it must be Thanksgiving weekend! I remember when I was a kid, the only important thing about thanksgiving was a day off from school. Now that I'm older it really makes me stop and think about everything I am thankful for and that extra day off from work; well that's just a bonus!

My wife and I are very lucky to have our health. As far as we know there are no problems and we both have a clean bill of health. One thing I have noticed is the rise of cancer in the population, and not just older people it's with the young people as well. I've talked to my family doctor and she says not to worry about cancer until my 40's, but I think there's nothing wrong with preventative maintenance. I used to get a physical every two years but now I started going once a year and I've tried to incorporate more exercise and healthy eating into my lifestyle. We both try to eat healthy, but we all know how hard that is when our society is bombarded with fast food commercials and the food that our grandparents ate is now called "Organic" and is double the price. I am very thankful that my wife and I both have our health, and have food in our fridge when so many in this world are sick and starving.

We are very blessed to have a new house this year. Even though we live in a large city, we built in a very quiet neighborhood that makes us both feel safe and secure. It's a great house that will last us for the next phase of our life with enough room for two little ones when the time comes. With a nice house comes a nice mortgage, but we are also blessed with two great jobs and the smarts to make extra mortgage payments each year. I am very thankful to have a roof over our heads when so many people lost their house to disaster or foreclosure.

Having great friends and family is what helps gets us through the thick and thin. My wife and I both grew up in happy families and while no family is perfect, it gave us the solid start that some kids don't have access to. It seems as I get older, there's less time available for friends, and my friends have families now of their own which makes it even harder to hang out. I think once our backyard is ready next year there will be many, many BBQ's parties for years to come. I am very grateful for my amazing friends and family. They are a great support system to have in a world full of craziness and chaos.

I know this blog is supposed to be about financial freedom, but it's important to take time out and be grateful for what we have this weekend. Perhaps look at our lives and change the things we are not proud of, or steer our life around the "rocks" that we can't change. Have a great Thanksgiving weekend, everyone!

What are you grateful for this weekend?

Dividend Income For September

Sorry for the delay in my postings, September has been a very busy month for me. I've been working very hard at my job and preparing for my first Fall as a homeowner. Everyone seems to work hard for their money but since I've discovered dividend investing, I've finally found a sure fire way to make my money work for me.

My total dividend income was $368.21 for the month of September. I was probably watching T.V. or deciding which ice cream I wanted for dessert when my dividends were paid to me; that's about how hard I work for them. My dividend income for last September was $284. That 29.5% increase was brought on by dividend increases and re-invested dividend income that I used to purchase more shares. My compounding machine is coming along quite nicely even though the markets are turbulent.

INVEST OR PAY OFF DEBT?

 It's very tempting to funnel money away for investing purposes, especially when the markets are low. I think it's important to find a balance between paying down debt and investing in the stock market. If you have a mortgage, you'd be a fool not to make extra payments when you have extra money to invest. It seems painful I know, paying even more money then what that bank takes out every month, but those extra payment go right to the principle which lowers the amount of money you pay in interest each month. 

To show you how big of a nerd I am, I will let you in on a secret of mine. Every two weeks when a mortgage payment goes through, I compare the old balance to the new balance and find that the amount that goes toward the principle increases by .29 cents each time. My wife thinks I'm crazy but I get excited knowing my mortgage is slowly getting smaller and smaller. Perhaps I am a little "Loonie".

To my dozens of readers, do you have any quirks when it comes to paying down debt?