Peter Boys, Boys Financial Services

Tough Lessons Families Are Learning During This Downturn

tough lessons

Life’s tough lessons: One of the tough parts of what I do is meeting with young families who have got themselves into a financial mess trying to live the “Canadian Dream”.  Unfortunately, our younger generations are not being taught finances in school or at home.  Every high school graduate should be schooled in basic finance and economics. When I ask couples what they are paying for interest on their mortgage or loans, few seem to know. Another common situation that I find is they often have money sitting in a savings account paying little or no interest while carrying a balance on their credit card. That is great for the bank’s profitability but very poor money management. This is one of the reasons the “You’re richer than you think” bank ad on TV makes me mad!

Depreciation – the hidden cost of ownership: Many couples have more than one vehicle and a few toys, all being financed! This is where the conversation about depreciation comes in. Consider a new top-of-the-line half-ton costing $65,000 and financed for 84 months at 0%. By the end of year three it may be worth $30,000, but the amount still owing is significantly more than it could be sold for! This is the hidden cost of depreciation that few consumers factor in. For example, I recently purchased a 2012 Dodge Ram in like-new condition for $33,700 with 41,000 kilometers, as compared to a new one at $63,000. It’s tough on the previous owner who traded it off but a great deal for me!

The importance of a rainy day account: A big concern that I have with the current oil patch slowdown is that many families were not prepared for the drop in income. It’s tough to adjust to a four day work week or less after being accustomed to a lifestyle based on 20 or more hours of overtime a month. The financial reality hits home very quickly if one’s spending is not reigned in. Lines of credit get maxed out, balances carried over on credit cards and bills not paid. This reinforces the need to be saving 10% of what you earn for a “stuff happens” fund.

The importance of understanding budgeting: Budgeting is just tracking income coming in verses expenses going out of your bank account.  The first step is to track your spending for a couple of months. There are numerous smartphone apps for this or just use a simple notebook. Once you know where the cash is going you can start to take control. Then you need to set ‘yourself’ up as another payment that goes into a savings account.  $50 or $100 every pay period adds up and builds a “stuff happens!” fund, ideally, to cover three months of expenses.  Once this is in place, start contributing to a Tax Free Savings Account (TFSA). Learn to use your credit cards as a way to defer money coming out of your chequing account for up to 45 days, but always pay the monthly balance owing on time to avoid the draconian 19% to 22% interest penalty for late payments. If you can’t control your spending, cut up your credit cards and use a debit card so you can’t spend money that you don’t have!

A trusted financial advisor can help you learn how to get control of your money. It’s a life-long skill that will pay off on spades in the end!
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