Fraudsters are becoming increasingly sophisticated. It’s understandable how someone can fall victim to fraud which is why this post informs you on how to protect yourself from the many tricks and deceptions fraudsters use. We also explain your debt relief options if you are dealing with overwhelming debt because of fraud.

Common financial scams and fraud

E-transfer and payment scams

Fraudsters often get you to send money through an electronic transfer (e-transfer) like Interac, prepaid cards, and even Bitcoin.

Popular e-transfer scams include:

• the buyer/seller scam, in which you agree to buy something and e-transfer money only you never receive your product;
• the rental scam, in which a landlord asks you to pay a deposit to secure a unit, but then the unit turns out not to exist;
• the work-from-home job ad scam, in which you are asked to send money for training and supplies but are never reimbursed because the job is fake;
• The deposit or cheque to your account for too much money, after which the vendor asks you to send some funds back, only the original amount will bounce out of your account later by your financial institution.

There are many more examples of e-transfer scams. A commonality in all these scams is that you never meet the person face-to-face or that details are vague. Know that once the recipient receives an e-transfer or gift card, it cannot be reversed. Always exercise caution before sending money.

Debit card or credit card fraud

When using your debit card or credit, you are generally protected against unauthorized transactions if your PIN is well-protected. But you could be held responsible for financial losses if you did not properly guard your PIN. Unfortunately online fraud involving credit cards is common.

Avoid using obvious PIN codes like your birthdate or phone number, telling your PIN to someone else, even a family member, writing your PIN down near your card, and not reporting your card being lost or stolen within a reasonable time. Read your card agreement carefully so you understand your responsibilities as a cardholder.

You should always report any transactions you didn’t make or approve of to your bank or credit card issuer immediately so they can issue you another card with a new credit card number and cancel the old one.

Phishing, smishing and vishing

Be cautious about the validity of unsolicited emails and links (phishing), phone calls (vishing), text messages (smishing) and snail mail that purport to be someone else (often the Government of Canada or the Canada Revenue Agency) who then ask either for funds or personal identification information.

With this information, fraudsters can steal your identity and potentially hack into your bank account or other application, transfer funds, make unauthorized purchases, or take out credit in your name.

Financial recovery is often much more difficult in these circumstances. Your bank will investigate how the breach occurred but may not reimburse you if you can’t prove fraud. Fraudsters can sometimes log in through an IP address you have used, making it harder to prove that the funds were stolen by someone other than you. Always make sure to use your computer through a secure Wi-Fi connection and never share your banking or other financial information with anyone,

To add insult to injury, there have also been reported cases of hackers re-targeting victims by telling them they can recover their stolen funds. This scam is known as the recovery pitch. Scammers again pose as your financial institution and contact you with a way to recover your funds if you give them either an advanced fee or access to your computer so they can “restore” funds. Know that you should never pay an advanced fee to obtain a refund, nor should you let anyone, no matter how legitimate they seem, get access to your computer or any personal belongings.

Canada Revenue Agency / CRA Scams

If the Government of Canada or the provincial government has a program that impacts your finances, you can inevitably expect phone calls or text messages about CRA programs from fraudsters. Scams surrounding COVID-19 vaccines, CERB and CESB payments, climate action incentive payments, and grocery rebate payments abound.

If you receive texts or calls that say they are from the CRA, Service Canada or any other government agency, do not respond with any personal information or click on any link. Login directly to your MyCRA account or contact the agency directly yourself.

Emotional scams like romance or grandparent scams

Fraudsters always try to take advantage of your situation or stress, but it becomes easier for them when you believe family or emotions are involved.

In romance scams, fraudsters take advantage of your affection, professing a need for funds and playing on your love. In grandparent scams, someone calls and impersonates a grandchild or other family member in a crisis, often a car accident or threat of jail, and asks you to send money or gift cards to help them out.

Never let anyone guilt you into sending money, especially under duress. Do not give banking information, money or credit to someone you met online or have only a short-term relationship with.

Identity theft

Identity theft happens when a criminal obtains personal details like your social insurance number, bank account information, credit card statements, home address, tax information, and other sensitive data.

Protect yourself from identity theft and debit or credit card fraud with these tips:

1. If you get an email or text message from a bank or company asking for personal information, don’t respond. Contact the organization directly to verify that the communication did come from them.
2. Use strong, complicated passwords and don’t make them obvious or easy to guess, like using your birthdate, pet, or family name.
3. Set up alerts on your banking and credit card accounts. You will get an email or text letting you know of any activity so you can act right away if actions were taken by someone other than you.
4. Protect your cellphone with a robust lock code so it can’t be easily accessed.
5. Monitor your credit reports regularly for any unusual lending activity. The sooner you are aware, the sooner you can stop fraudulent activity in your name. You can also prevent damage to your credit score if you catch the activity early.

Advance fee loan scams

Advance fee loans are illegal in Canada, yet they continue to persist. We have met with clients who were victims of loan scams and faced worsened debt problems.

Advance fee scams involve a fraudulent lender promising to loan you money if you send payment up front to guarantee the loan, complete the application, or cover processing costs. Of course, after you pay the fee, there is no loan. These fraudsters prey on borrowers who have a low credit rating, need cash, and can’t get approval for loans from their bank. In Ontario, it is illegal for a lender to ask you to pay an upfront fee before obtaining the actual loan.

Investment scams and tax schemes

There are many types of investment scams and tax scams, but they all promise to make you rich with no risk.

Fraudsters target you with an investment scam using social media, online ads, email, text, or phone calls. They may create fake social media profiles identical to your friends or family so their messages appear legitimate.

Some signs of investment scams include being required to pay a finder’s fee in advance, being guaranteed a high return on low-risk investments, being told it’s a limited-time offer, and you need to act fast, and being pressured to send money. Beware if the person is unwilling to answer your questions or gives you evasive answers. If an investment sounds too good to be true, it likely is. Don’t feel pressured to act.

How does financial fraud impact your finances?

Being a victim of fraud takes its toll on you emotionally. You might feel embarrassed or guilty, and severe loss can lead to depression.

Unfortunately, financially the loss can be just as devastating, including:

• Loss of the original funds, especially if you voluntarily send money to someone via e-transfer or gift cards.
• Identity theft as a result of providing personal information to a potential scammer. They can then use your identity to attempt to access your accounts and even apply for credit in your name.
• A stolen credit card or unauthorized loans can hurt your credit score if you do not report the fraud and have the charges reversed.
• Unauthorized credit due to identity theft will also hurt your credit score. It can often take months or years to deal with the impact of a stolen identity on your finances and credit report.
• Losing funds through fraud can leave you unable to manage your personal expenses, resulting in the need to borrow funds to pay your bills. This can lead to debt problems if the amounts are large or long-term.

Warning signs that you are dealing with a scammer

By now, you probably have a general idea of the warning signs but beware when an unknown person and potential scammer:

1. Initiates contact by phone, text messages, email, or visiting your home.
2. Creates a sense of urgency to get you to act fast without thinking through their proposal or doing any research.
3. Poses as a credible institution like a bank, government official, or other professional service and asks you for personal information.
4. Requests that you wire them money via e-transfer, prepaid cards or gift cards.
5. Tells you not to share their offer with anyone else and to keep the discussion secret so that you don’t involve someone who may question their tactics.
6. Makes an offer that sounds too good to be true. It’s low risk with a high return, making it attractive.
7. Asks for payments upfront before giving you what they have promised.
8. Preys on your emotions and uses guilt as a trick to get you to act.

What to do if you are a victim of fraud

While I hope this never happens to you, here are the steps you need to take should you ever be a fraud victim:

1. Your first step should be to inform your financial institutions of the situation so they can better verify before lending to someone else under your name.
2. Change all your passwords, including banking, email, and other sensitive accounts.
3. Contact both Equifax and TransUnion to place a fraud alert on your credit report. This will not hurt your credit score. This alerts all creditors to be vigilant before lending under your name for any kind of loan.
4. You may also consider reporting to the Canadian Anti-Fraud Centre at their toll-free number -1-888-495-8501 or through their Fraud Reporting System. This helps spread awareness so that others may stay safe.

We understand that no one wants to be a fraud victim. Unfortunately, with how clever hackers and scammers are these days, innocent people suffer financially and emotionally.

Dealing with debt due to fraud

While rare, we do see individuals in our offices who end up in debt because of fraud. Their financial problems can be because they lost their savings and turned to debt or because of debt taken out in their name that they could not reverse.

Filing for bankruptcy or making a consumer proposal to reset your financial situation may be necessary. If you incur debt from a scam, talk to a licensed insolvency trustee about debt relief options.

Another word of caution relates to unlicensed debt consultant scams. Unlicensed debt consultants prey on heavily indebted borrowers who are scared to speak directly to a licensed insolvency trustee or worried they will have to file for bankruptcy. They use this fear to their advantage and offer a comforting sales pitch about providing a better plan to eliminate debt. All they do is refer their clients to a licensed insolvency trustee anyway to file a consumer proposal, a common alternative to bankruptcy. But before the referral, they charge thousands of dollars in unnecessary fees, putting unsuspecting customers deeper in debt. Remember that you do not have to pay a fee to see a trustee.

If you have a lot of debt, speak to a Licensed Insolvency Trustee directly for proper advice and avoid the costly middleman.

The post Fraud Can Cause Debt Problems. Here’s How to Stay Protected. appeared first on Hoyes, Michalos & Associates Inc..

A tax refund can be a sizeable windfall for your finances, so how do you make the most of it? Below I outline some smart ways to spend your refund.

1. Plan – budget your tax refund

As soon as you file your tax return and have an accurate estimate of your refund amount, you can start thinking about how to use this extra cash. Even if you are not a fan of hard budgeting, you want to have a general idea of your immediate priorities to be sure you are financially covered.

Ask yourself the following questions:

• What debts do I owe? Any high interest debt?
• Am I behind on paying any bills?
• What important purchases have I been putting off – clothes for my kids? Health or dental checkup? Car or appliance repair?
• What expenses do I have coming up over the next few months – birthdays? Vacation? Christmas?
• Do I have an emergency fund setup? Is it fully funded yet?

Of course, I am not suggesting that you can’t splurge on anything fun. Feel free to set aside some portion of your refund for just fun spending money. The point of this exercise is to have you think in advance about how much of your refund is for fun and how much should go to meeting your financial needs.

2. Pay down debt

Yes, I am a licensed insolvency trustee, so naturally, I believe that the lower your debt burden, the better your personal finances will be.

If you have multiple debts, figuring out which debt to pay down first can be daunting. Should you pay off your credit card debt first or put more towards student loans or line of credit debt?

Here is how I would approach it:

• Make a list of every debt you have. Write down the name, the total balance owing, the interest rate, and minimum monthly debt payment.
• Arrange your list by putting the highest interest rate debts at the top and work your way down to the lowest rate.
• Start by paying down the highest interest rate debt first. This will save you a lot of money on interest charges and help you get out of debt faster.

3. Save money by investing in sales

When you have no extra cash, you can only buy the smallest quantity of whatever you need. You can’t buy in bulk because you can’t afford to spend your limited cash. Your tax refund money is a great way to take advantage of sales or bulk purchases at the grocery store.

For example, if chicken is on sale, buy extra, and freeze it (but don’t buy more than you think you will use or can store before it goes bad). If the jumbo pack of toilet paper is on sale, great, invest in it! You can also stock up on other staples like canned goods and pasta which have a long shelf life.

4. Prepay your monthly expenses

Another smart way to spend your tax refund is to prepay your unavoidable monthly expenses like your phone bill, hydro, gas or water bill.

What do I mean by this? Instead of waiting until the due date for these bills, overpay them now. For example, if your bill is $100 per month, send $200 now. The utility company may wonder why you are giving them extra money, but they will be happy to keep your funds on deposit. Once they have your money, it’s out of your bank account, so you will not be tempted to spend it somewhere else. A better example is loading up your fridge, freezer and pantry on food and supplies you will be buying anyway, but we already covered that in point #3.

5. Hide your money – set up a savings account

If your cash is in your wallet, it is easy to spend. If it is in your bank account, and you see it every time you open your banking app, it is visible, so it is easy to spend. How do you hide your money?

You could have a separate savings account at a different bank where you stash your savings. Since you don’t pay bills from that bank, it is hidden, so you are less tempted to spend it.

Another option is a Tax-Free Savings Account (TFSA). You can’t attach a debit card to a TFSA, and you can’t pay bills with a TFSA. To access your money, you have to make a specific transfer from your TFSA into your chequing account to get your money out. A TFSA creates more barriers before you can spend money than having cash in your wallet. It is a good way to hide your money from yourself and achieve your longer-term financial goals. These may include:

• Buying a home and saving for a down payment
• Home improvements or remodeling
• Going back to school and saving for tuition fees
• A hefty emergency fund, enough to cover expenses in case of job loss
• Enough retirement savings; max out your RRSP

A tax refund is a great windfall in the year to put towards any of these plans for a better financial future. But all these goals require time and consistent saving, which you are more likely to achieve if you can’t easily access your savings accounts for short-term spending.

Should you pay for a faster tax refund?

Now understandably, you may be anxious to get your tax refund sooner so you can kickstart your savings or eliminate any financial burdens. I understand. But be aware that there are companies preying on this anxiety every tax season. You may see signs for instant cash back on tax refunds, where the tax preparation company gives your refund to you on the spot when you file. But while this offer seems convenient, these companies effectively act as lenders and charge you a hefty fee for the instant refund.

If you want your tax refund quickly without extra costs, I recommend filing your tax return online and applying for direct deposit. You can expect to get your full refund in just two weeks if you file this way.  

You can also check on the status of your refund with CRA either online or through your MyAccount or MyCRA mobile app.

If you are struggling with debt and your tax refund isn’t enough…

Maybe your credit card balances or other debts are too high for your tax refund to sufficiently pay off. If your debts are causing you undue stress, consider learning more about filing a consumer proposal to get relief. A consumer proposal will help you eliminate unsecured debts while also allowing you to keep your tax refund. Contact a Licensed Insolvency Trustee today for a free consultation to learn more about your debt relief options.

The post Top Five Things To Do With Your Tax Refund appeared first on Hoyes, Michalos & Associates Inc..

What is zero-based budgeting?

Zero-based budgeting means that every dollar of income you have coming in must be accounted for in your budget. Every dollar is given a purpose by being allocated to specific expenses, savings, or debt repayment. The idea is that every month your budget is balanced to zero.

Before you get excited, no, that doesn’t mean that you get to spend all your money. It’s not continuing the current cycle you may be in of living paycheque to paycheque. It means that you decide at the beginning of each month exactly where you are going to allocate your hard-earned cash, and then you stick to it.

Why use zero-based budgeting?

Humans are notoriously bad at planning for the future. It’s in our genetic make up to live in the here and now – which makes impulse spending a common challenge for most of us.

A zero-based budget is an effective budgeting method for those who struggle to save or pay off debt because they lack focus. When you use zero-based budgeting, you force yourself to spend within your means, save money and pay off debt. By ensuring that you don’t skip any priorities, you are much more likely to meet all your financial goals.

How do you make a zero-based budget?

A zero-based budget follows this one simple formula or rule:

INCOME minus SPENDING minus DEBT REPAYMENT minus SAVINGS equals ZERO.

In other words, it’s a zero-sum budget.

A zero-based budget is no harder to create than any other form of traditional budgeting.  

Start by analyzing your incoming and all outgoing cash flow demands

Your income is relatively simple to list. It should include your net paycheque, social assistance, child or spousal support, pension income, business income, rental incomes, and any other cash you bring in.  If you earn commissions, estimate on the low side. If you earn more or get a bonus, our recommendation is to exclude this initially.  This provides some buffer in your planning and ensures that you don’t go negative right off the bat.

Your outgoings may be harder to nail down at first. If you don’t know where you are spending your money today, start with a 30-day spending journal. Look through all your past credit card and bank statements and utility bills for on-going expense items. In addition to the big three – rent or mortgage, food, and transportation – be sure to include all memberships, an amount for personal care, prescription medications, anything you spend money on. Don’t forget to include periodic or seasonal expenses like insurance premiums, property taxes or gifts.

Zero-based budgeting accounts for all cash outlays so you also need to list all the money you spend each month either paying off debts and any amounts you wish to set aside for savings. And of course, I highly recommend allocating a small amount each month towards building up an emergency fund.

Subtract your outgoing spending from your income until you balance to zero.

Once you have a clear picture of exactly what money you have coming in and out each month, it’s time to balance them to equal zero. Your initial budget might reveal that you are spending way more than you have coming in.

To get your budget to balance you can:

• increase your income
• find cost savings to decrease discretionary expenses
• increase or decrease debt repayment. Remember however that you must keep up with all minimum payments.
• increase or decrease your savings

Ultimately, it’s your zero-based budget. Your rules.

The key advantage of zero-based budgeting is that it mimics what you must do in real life to achieve your financial goals. If you want to allocate more money to savings goals or debt repayment, you need to cut back on expenses somewhere. All that matters is that you clearly assign your money somewhere – otherwise, you may spend it on a whim on who knows what.

How do you know how much you should save or spend? 

Keep in mind your initial goals. Do you want to eliminate debt? Do you want to increase savings?  When choosing where to spend your money, make sure you meet your very specific financial objectives.

You can use rules of thumb to distribute your money like the 50-30-20 rule, which means that:

• 50% should be spent on things you absolutely need (rent, groceries etc.)
• 30% should be the maximum you spend on things you want (gym memberships, vacations, clothes, fancy food etc.)
• 20% should be immediately saved (goals or retirement) or put towards paying down debt.

However, these rules of thumb are not realistic for everyone. If you have a lot of credit card debt, then you may want to allocate more than 20% to pay off high interest debt sooner. If your income is high you may not have an extra 30% for discretionary spending. Your rent or mortgage might take up more of your income, limiting how much disposable income you have to allocate.

The zero-based budgeting approach makes sure you allocate money first to the most important items like necessary expenses and debt repayment or savings. For your budget to work, it must be realistic. If your living costs are high or you have a lot of debt, meeting your goals may mean making some hard choices to reduce discretionary spending for a while.

Track your results

All that’s left to do now is to track your progress. You can do this with an app, on a spreadsheet or simply automate your bill payments and savings, so they align with your zero-based plans.

A zero-based budget works very well alongside the envelope method or reserved bank account method. Once you balance your budget to zero, you move money into these envelopes or separate bank accounts in accordance with your overall plan. I often recommend against leaving your entire paycheque in your checking account. It’s too much of a temptation to spend. If you’ve earmarked monthly income to cover certain future expenses, move the money out into a separate account you use only for that purpose.

Don’t worry if you have a few slip-ups. Looks at your line items again to see what you can reduce to make up for where you overspent – your budget should still total zero at the end of the month.

Does zero-based budgeting mean zero flexibility?

No, absolutely not. At any time, you can tweak how and where you allocate money throughout the month. Priorities and situations change, and your budget can and should adjust accordingly.

The best thing about zero-based budgeting is that you get to spend your money guilt-free. If you have allocated $100 to your restaurant fund for the month, then by actually spending that money you are simply sticking to your budget. Rather than feeling guilty, you can spend your money stress-free, safe in the knowledge that you’re only ever spending within your means.

Creating a zero-based budget is a powerful way to put you in control of your finances. You consciously decide exactly where and how you are going to spend every cent you make, which in the long run will help you to achieve your financial goals.

Zero-based budgeting is absolutely not about taking away your financial freedom. It’s about putting you in charge of your budget so that you can enjoy more of the things you love, without worrying about a nasty surprise at the end of the month.

The post Zero-based budgeting: How to Give Every Dollar a Purpose appeared first on Hoyes, Michalos & Associates Inc..

While most people think of budgets as constraints, we like to think of a budget as nothing but a plan. We gave you a plan to be debt free; now you need a plan to stay that way.

However, budgeting can seem daunting, especially if you’re a beginner. This article will answer some key budgeting questions and will hopefully help you create your first budget. Follow these tips to create a budget and learn more about how budgeting can help you move from struggling to pay expenses to setting aside some savings.

What is the first rule of budgeting?

A budget is a plan of how you will spend your money. It helps you identify your expenses before the month even begins so you can spend your money more responsibly.

The first rule of budgeting is to give every dollar a purpose. This isn’t the same as spending every dollar that comes in on your paycheque. It means you allocate all your income to something specific. That might be paying for living expenses, building some savings or making a debt payment.

A budget helps you avoid the temptation to overspend. It makes sure you don’t run out of money by payday, so you don’t use your credit card to pay for things.  Your budget should never be balanced with debt.

Basic elements of a budget

Before creating a monthly budget, it is essential to understand the different elements of a budget, including monthly income, fixed and variable expenses, discretionary expenses, and savings.

Monthly income

Your monthly income is how much money you have coming in that is available to pay bills and save. When creating your budget, you want to record your net income. If you are employed, simply record your net pay from your paycheque.

If you are self-employed, you may want to create a separate business and personal budget. After deducting your business costs, move your net business income to the income line in your personal budget.

Fixed expenses

These are expenses that stay the same month after month and include mortgage, rent, and insurance. If you have a fixed phone plan, this also counts as a fixed expense. Generally, these are expenses that are easy to identify but hard to alter.

Variable expenses

These expenses change every month depending on use. For example, your electricity bill changes from month to month. Variable expenses include utility bills, transportation, and groceries. While these are ever-changing, you can account for them in your budget through approximation. Do yourself a favour and over-estimate these expenses, so you don’t get a negative surprise at the end of the month. It’s better to over-plan than run out of money.

Discretionary expenses

These are expenses that aren’t necessary – they’re wants rather than needs. While groceries are a necessary expense, entertainment is not. Examples of discretionary expenses include dining out, hair treatments, streaming services, video games, and gifts.  You don’t have to give all these items up. That’s not what budgeting is about. But knowing what is discretionary spending is how you can find things to reduce if you have more money going out than coming in.

Unplanned expenses

Emergencies are inevitable, and it is important to plan for them when making your budget. Unplanned expenses include replacing damaged items, unexpected healthcare needs, and emergency travel.

Savings

Saving for a rainy day is what keeps people out of debt. Even a small emergency fund is helpful. Long-term savings is what you set aside to spend in the future – a vacation fund, your retirement plan or an RESP for your children.

Organize your budget

An organized budget allows you to see everything for what it is without any clutter. Income and expenses are usually grouped together in categories.

Categories and line items

Categories and line items are useful since they group expenditures and make it easier to track. This organization clearly shows where your money is going and can be extremely helpful when trying to change spending habits.

Categories differ from person to person and depend on spending habits and lifestyle. Common budget categories include housing, food, transportation, medical costs, personal care, clothing, and entertainment. Adding a “miscellaneous” category is useful since you may have spending that isn’t budgeted for in other categories.

You can break these items down further if you want, but don’t feel pressured to have a thousand categories. Too much detail is going to frustrate you and make keeping track a chore. Budgets often fail because people get tired of maintaining them. Keep it simple, and you are more likely to continue.

Common expenses you shouldn’t forget

You can be as thorough as possible looking through bank statements and old credit card bills and still forget to budget for some expenses. Make sure not to forget these common expenses when creating your budget, which is easy to do as they often come once a year:

• Home & car maintenance costs
• Annual insurance premiums, licenses, and registrations
• Holiday and celebratory gifts
• Vacations

Choose a budgeting method

There is no one right budgeting method that will work for everyone. Some people will love tracking on a spreadsheet; others are comfortable with online budget apps. Others won’t want to track at all but do want to manage their money better.

Here are some budgeting methods that work well for someone just starting out with their first budget and who may be working with a limited or stretched income.

Paying yourself first

This budgeting strategy treats savings and investments as bills. By putting money for savings aside, you’re essentially paying yourself before paying any of your other bills. This prioritizes your savings goal by getting it out of the way first.  This is not about paying yourself before your rent, but it is about setting aside even a small amount before spending on discretionary items.

You can start out small – $5 or $10 a week. Increase this slowly as you get comfortable with how much you can save.  Set this money aside into a separate bank account to make sure you don’t tap into it except for its planned purpose.

Paying yourself first is a very good budgeting system for those who want to focus on building savings.

The modified ‘envelope’ system

Relying on credit cards to pay for things can quickly lead to overspending. That’s why a cash-only budgeting approach is popular for those starting out on a new journey of building better spending habits.

It’s true we don’t live in a world where we can pay for everything with cash today. No problem. With so many online banking options, you can use separate bank accounts as your envelopes. Just make sure these accounts have no banking fees for anything, including money transfers, debit transactions, and withdrawals at a bank machine.

Different bank accounts stand for different categories in the modified envelope system, and these accounts are each filled with specific amounts of money. The money can only be used for those specific purchases. Once the money is gone, you have to wait until the next month or paycheque (depending on what time period you choose to replenish your accounts).

The modified envelope system is a good budgeting approach for those who want to avoid overspending.

Pay your bills as you go

This is the opposite of the paying yourself first method of budgeting. With the pay your bill as you go budgeting system, you prioritize bill payments by making a small payment towards your monthly expenses every time you get paid.

If your cell phone bill is $120 and you get paid every week, you pay $30 each week.  For items you can’t pay online, you can set aside money each pay period. For example, if your rent is $1,100 a month and your landlord prefers a cheque, set aside $275 each weekly pay in your ‘rent’ account so the money is there come the first of the month. 

You can do the same for large annual costs, setting aside some money from every pay to cover these when they come due.  Once you have your non-discretionary costs and any planned savings set aside, everything left over from your paycheque is yours to spend however you like.

The pay as you go budgeting method works well for those who do not like to do a lot of tracking but want to stay on top of their bills.

What is a realistic budget?

When budgeting, it is important to remember that this should be true-to-life. If you have student loan payments and credit card debt, it will obviously take you longer to save. If you are closer to retirement, you may need to focus harder on saving for retirement. All these factors should be taken into account when making budgeting plans and adjusting your spending.

A realistic budget is honest and considers all expenses carefully. When making your first budget, it can help to look through previous bank statements and credit card bills to learn about your spending habits. Another approach is to do a 30-day spending plan. This can be done manually or with the help of software such as Mint and GoodBudget.

Most importantly, a realistic budget is one that works for you. Only you can decide what your future financial goals are. Set a first budget that’s reasonable and creates the future you want to build. See how it goes, consider it a draft budget, adapt and change as you learn.

The post Top Tips to Help You Create Your First Budget appeared first on Hoyes, Michalos & Associates Inc..

I’ve pulled together a round-up of 7 common reasons why budgets fail along with tips and tricks to help you succeed at budgeting no matter what system you use.

You don’t have a ‘fun’ category

This may seem like a strange item to put at the top of a budgeting blog by a firm that focuses on debt reduction, but it is often the number one reason why budgets don’t succeed. You can be too strict with your spending. If you don’t allow yourself some room to enjoy life and have a few little extras, you are more than likely going to give up. As long as you live within your means and meet your savings goals, it’s up to you to decide how you want to spend your money.

Every person in your household should have a ‘fun’ budget that allows them to spend money however they choose whether it’s to purchase the odd café latte at Starbucks or to pay for a favourite streaming service. The budget amount can be small but make sure something is allocated for everyone.

You don’t plan for unexpected expenses

Cars break down. Your hours can be reduced. If you don’t have any savings to fall back on, you won’t be able to pay for an unexpected expense without turning to more debt.

I’m not talking about enough money to live for three to six months in the event you lose your job recommended by most financial planners. I’m talking about a small slush fund to help you pay for an emergency vet bill, house repair, medical expense or childcare cost. Many people I meet use payday loans in these situations, which is a sure-fire way to ruin your budget. When you first start your budget, setting aside even $20 a week will help you build this small emergency fund in no time.

You are missing expenses

One of the most common reasons why budgets fail is because you don’t have a good starting point. If you don’t know where you are spending your money, how can you plan your bill payments or balance your budget without running out of money at the end of the month?

How do you overcome this type of budget failure?

Watch out for annual expenses. Not all expenses happen monthly. Be sure to include a monthly amount to fund annual expenses like your car insurance, property taxes, school fees, etc.  Do a thorough check of your bank statements and old bills. This is where an online expense tracking app can help you find all the ways you spend money.

Avoid underestimating what you spend. A great way of doing this is by tracking your expenses for at least 30 days. A 30-day spending plan forces you to learn how much income you have coming in and what your expenditures are. Most people are very surprised to find that their actual spending habits vary quite a lot from where they think their money goes.

You don’t have a miscellaneous category

Every budget needs a little wiggle room. Sometimes prices increase, you need to buy an extra birthday gift, or you have an opportunity to upgrade something in your home at a good price. 

This is different than your family fun category. This is for life necessities you may have forgotten to include in your budget. Even if you maintained a spending journal and carefully reviewed all of your old bills and statements, you may have missed something. A miscellaneous budget category can help with that. If you don’t need it, don’t spend it. Put the difference in a savings account for the time you may need it. At the end of the year, if you haven’t used this money, you’ve now got some bonus savings to allocate where you wish.

You don’t have a focus

Budgeting isn’t hard but it can be frustrating and demotivating. If you don’t have a clear financial goal in mind about exactly why you are doing it, it’s very likely that you’ll lose steam and give up.

How do you stay motivated to stick with your budget?

Write very specific goals and set reminders. Before you start trying to execute on your budget, spend some time writing down exactly what it is that you hope to achieve including setting a target date for you to want to achieve it by. If you want to reduce debt, write down your target balance for every month over the next twelve months and check-in. If you made it, you’ll feel motivated to keep going. If you didn’t, don’t get discouraged – revisit and revise – to a better target date.

Don’t try for too much detail. While you want to track all your expenses, you don’t need to plan down to the dollar. A category for groceries is fine – you don’t need to plan out by meal or by week.  If you try to capture too much detail, you will quickly become overwhelmed with record keeping. Make your budget as detailed as you are willing to track.

Don’t set unrealistic goals. If your plan is to reduce credit card debt, allocate as much in your monthly budget towards debt payments as you can afford but recognize if you are currently only keeping up with the minimum payments, it will take a while. When looking for expenses to cut in your household budget, don’t overestimate how much you are willing to sacrifice. A successful budget is one you can realistically achieve.

All of these add up to a SMART goal: specific (what), measurable (how much), attainable (a realistic goal), relevant (what you want) and time-based (when).

You’re using the wrong budgeting approach

We’re all different, and what budgeting system works for one person won’t necessarily be suitable for another. Because of this, an ongoing budget process can involve some trial and error to find what works for you.

Some people like to track their details and record things. Others don’t want to record every dollar they spend. They just want to stay on top of their bill payments, pay down debt and start building some savings.

That’s why, at Hoyes Michalos we recommend two possible budgeting approaches:

• using our traditional free budgeting spreadsheet or
• automating and paying your bills as you get paid.

You’re using the wrong payment tools

It’s also important to use the right payment tool. If you don’t have control over your spending, it’s time to hide the credit cards. Use cash for spending or set money aside in separate envelopes or accounts designed for a specific purpose.

Automate bill payments so you don’t forget to pay them on time.  Paying a portion of your bills every time you get paid even if it’s before the bill is due, ensures you pay for necessities before wants.

What happens if you fail?

Don’t beat yourself up if you slip up from time to time. It’s normal, and it happens to the best of us. The key is to spot the behaviours that are likely to steer your budget off track, and consciously try to curb them. If they happen once in a while, it’s OK. You’re already actively changing your behaviors so that they don’t become the norm, and that deserves a high-five.

Remember, budgeting is a learning process. Commit to learning from your mistakes and making adjustments along the way. If you do, you will achieve your financial goals before you know it! Good luck!

The post 7 Reasons Why Budgets Fail and How You Can Succeed appeared first on Hoyes, Michalos & Associates Inc..

Needs

Needs are things that are necessary for you to be able to live and work. They are your basic expenses. Needs are the things that keep you warm, dry, fed and mobile. Some of the most common basic needs are:

• Rent and mortgage payments
• Car expenses or public transport costs
• Home and health insurance
• Food and grocery items
• Clothing
• Utility bills
• Medical expenses

Wants

Wants are the little extras that bring fun or comfort into your life. Wants are what we desire. You might think you can’t live without them, but if push came to shove, you’d survive if you cut them out. Some typical examples of wants are:

• Vacation expenses
• Gym memberships
• Entertainment
• A portion of your clothing budget
• Coffee and lunch budgets

Wants aren’t bad. They don’t mean you are living a frivolous lifestyle. But wants are the first place to look when you are trying to balance your budget.

How do you distinguish between needs and wants?

It’s very hard to separate needs from wants. One person’s need might be another person’s want. For example, you’re an uber driver. You need a decent car to succeed. Your neighbour works at home and can take public transit. For him, a vehicle is a want.

Wants vary from person to person. They are tied to our personality, culture and economic position, so not every person has the same wants. Our wants are influenced by marketing, social media and the people we have around us. That’s why it’s important to look at your wants with a critical eye and in relation to what you can afford. It’s OK to include a few extras in your budget, but keeping up with the Joneses isn’t a good want.

Wants are also sometimes a matter of degree. For example, you need a functional coat for winter, but you want that high-cost designer coat. We do need an internet subscription today. But you might want the highest speed, most expensive package. Our daily choices can move a portion of our spending from a pure need to a partial want.

Wants can vary in intensity. Streaming is great, but subscribing to Netflix, Crave, Prime Video, and Disney+ might be something you can rethink if you are looking for cost savings.

Look out for wants that turn into a demand. You can think of this as lifestyle creep. When we can afford things, wants can turn into needs. You get used to having them, so you can’t see living without them.  It’s not always true, but that is our perception.  We think we need that gym membership to stay healthy. But the truth is you can work out at home or outside if need be.  Turning something from a want into a need permits us to overspend.

Why credit increases our wants and needs

Money itself isn’t a need or a want; it’s what allows us to pay for things. We don’t need money – we need food, housing, clothing and healthcare.

Be aware that credit helps us turn wants into needs. If you have room on your credit card, you think you can afford it, so you feel the need to buy.

Good debt can help us pay for needs. We can buy a house with a mortgage and can pay for education with a student loan. But bad debt is when we borrow more than we can repay or use credit to buy more than we should. Credit gives us the illusion that we have extra money. Buy too big a home and take on a supersized mortgage, and you’ve turned a need (shelter) into a want (a mansion), all on debt.  Using credit to buy big wants can limit your ability to pay for financial needs down the road.

Create a budget that balances needs and wants

The 50-30-20 rule

To create a budget that has room for both your needs and wants, you need to prioritize all your spending. Look at your current spending and divide all your outgoings into two categories: needs and wants. Put every single one of your expenses into one of the two categories.

Be honest with yourself when you do this. Your rent, car insurance, and grocery spend are all definitely needs, but you can likely categorize some costs as non-essential. 

Is what you want really what you want? Here are five questions you can ask yourself to see if you truly want something or can do without it.

1. What would happen if I didn’t buy it at all?
2. Would I pay to move it?
3. Is there something I want more?
4. Is there a cheaper alternative?
5. Will it help or hurt me in achieving my financial goal?

Creating this distinction doesn’t mean that you will have to cut out all the stuff in your want pile – that would be no fun. Rather, it gives you the overview you need to make a balanced budget that makes room for some wants while still allowing you to save or put more money toward other financial goals like saving money or paying down debt.

Once you have created your need and want lists, it’s time to create a budget that creates room for both.

A good rule for distributing your money is the 50-30-20 rule, which means that:

• 50% should be spent on things you absolutely need (rent, groceries)
• 30% should be the maximum you spend on things you want (gym memberships, vacations, clothes, fancy food)
• 20% should be used to save, invest or pay down debt.

Using this rule, you get to spend on your wants guilt-free. There’s absolutely no issue with buying a fancy winter coat rather than a more budget-friendly one, so long as it fits in within the 30% bracket of your overall budget. The key is to be honest about the difference between your needs and wants to make more conscious choices about how you spend money.

And remember, this rule only works if you have room in your budget. If you have limited cash flow, paying for needs should always come first.

Debt repayment is a need

One of the most overlooked necessities is debt repayment. If you have any outstanding debt, then you should be budgeting for debt reduction. To avoid late payment charges and negative hits to your credit score, you must keep up with all minimum monthly payments. However, if you want to pay off your debt sooner, you should put as much as you can afford every month towards your debts. Paying off your debts should be a conscious need.

If you have any debts, allocate as much as you can afford to pay them off. This will make your ‘need’ pile take up most of your available budget each month for a while, but in the long run, it will free up money you are spending on interest today to be able to afford more of the things you really desire.

How to find expense reductions among your wants

Here are some additional tips to help you look for ways to target items for savings:

• Nothing should be off the list. If you are serious about cutting back, you have to look at everything.  Live in a city with good public transit?  Even getting rid of your car may be something you want to think about.
• Get competitive quotes for everything. Taking a little time to compare insurance premiums, cell phone plans, and other costs can result in tremendous savings.
• Comparison shop. Don’t always assume the sale price at one store is the best deal. Look at alternate brands. You can often get comparable quality merchandise for a lower price just by switching stores or switching from the name brand to the store brand.
• Eliminate impulse buys. Last-minute shopping decisions almost always a want and not a need. Make a list and set priorities.
• Save ahead for big-ticket items. You don’t have to do without every wish or extra item. You just have to be sure you can afford it.  Put an amount in your monthly budget to save up for large cost items like a vacation.

The bottom line is to learn the difference between needs and wants if you want to have a balanced budget, stop living paycheque to paycheque and achieve your financial goals.

The post Needs vs Wants: Create a Budget That Balances Both appeared first on Hoyes, Michalos & Associates Inc..

Sound familiar? The lack of emergency savings became obvious during the coronavirus pandemic when more than 2 million Canadians were thrown out of work. With so many Canadians a paycheque away from making their monthly rent payment, should more have had an emergency fund?

And for those with debt which comes first: saving money in your emergency fund or paying down credit card debt? If you don’t have a rainy-day fund, is it fine to use credit cards or a line of credit during emergencies?

The truth is the answer is not as cut and dry as many financial experts make this sound. Even for me, a hold no debt guy, the answer lies somewhere in the middle.

Redefining what an emergency fund is

OK, everyone knows why you need an emergency fund. In general, experts recommend you have a minimum of 3 to 6 months of living expenses to cover a catastrophic event like a job loss or sudden illness.

It takes a lot of savings to have this much money available in liquid assets. For someone with high-cost debt payments, saving up that kind of cash not only doesn’t make mathematical sense, it’s also next to impossible.

The math

High interest debt like credit cards is a killer. At an annual interest rate of 19-21%, you’re paying around $200 in interest annually for every $1,000 of balance carried. With our average client carrying almost $15,000 in credit card debt their cost of carrying that debt load is $3,000 a year. If their monthly living costs for housing, groceries, transportation, child care, and other expenses are around $3,000 a month, you are asking someone to set aside an amount equivalent to the total debt they owe. The opportunity cost is a close to zero percent interest rate for a savings account against a credit card debt cost of $3,000 a year, even assuming they have the cash flow to save that much, which they don’t.

Catastrophic event vs emergency expense

I meet with people every day who face this dilemma. They are living paycheque to paycheque, barely able to make their minimum payments. This is when the smallest unplanned expense becomes a financial emergency. I’m talking about a car repair, new tires, gifts for Christmas, broken dishwasher, vet bill. Not significant life changes but financial hiccups we face every day.

The wrong solution is to turn to a payday loan or high-interest installment loan to cover an unplanned expense, but that’s what happens when you don’t have any money set aside, and you’ve already maxed out your credit cards.

Unfortunately, borrowing with a high-cost quick cash loan is what many of my clients do in this situation. That’s why almost 4 in 10 insolvent debtors have at least one payday loan. Taking on more bad debt to cover a small, but necessary, living cost is often the final trigger that causes bankruptcy.

Having even a small cushion in the bank can prevent this spiral into more debt.

Create a small buffer account while paying down debt

Even if you carry debt, I recommend saving $500 to $1,500 as fast as you can to cover the small life costs that you know will come; you just don’t know when. If you drive an old car, you know that at some point something is going to break.

A small contingency fund is a financial safety net that you use for sudden small expenses. With this, you can better manage your bills even in the face of a financial crisis. It also helps you avoid taking on more debt. It’s not the same as an emergency fund, which is more about income replacement or a major financial disaster like your house burned down.

I’ve talked about the 80-20 rule of money management before where 20% of the effort produces 80% of the results. A planned $1,000 account for unplanned expenses is like that. You’re 20% of the way towards your full emergency fund, but that small amount can stop you from spiraling further into bad debt.

Yes, I know putting $1,000 in a zero-interest savings account could save you $200 if you put that money against your credit card. But in this case, what we are trying to avoid is toxic debt like a 390% payday loan or a 59% installment loan.

Even if you don’t turn to a payday loan and have room on your credit card, driving up your balances is demotivating.

Having an expense slush fund also reduces the risk that you’ll miss a payment on your credit card debt. There is nothing more stressful than deciding between paying your credit card or paying for a car repair. Having a small amount set aside eliminates the risk that you’ll not only have to deal with the extra bill but late payment charges on your credit card statement as well.

As you’re saving up, you should continue to make more than the minimum amount due on your credit card bills when you can. This helps to reduce your compounding interest payments. If you keep paying just the minimum, you’ll remain in credit card debt for a long time.

How can you fund this slush account?

• Setting aside just $20 a week will build a cushion of $1,000 within a year.
• Set up automated savings, so it doesn’t even hit your chequing account.
• If you are paid bi-weekly and hit a 3 paycheque month, take one pay and set that aside.
• If you get a tax refund, set some aside (and use the rest to pay down debt).
• Sell something. We all have a lot of stuff, much of which we don’t use. Sell off what you no longer need.

Once you have enough money in your slush fund, use the avalanche method to deal with the rest of your debt. Focus on paying off all high interest rate debt before setting aside significant savings in a rainy day fund. Once you have debts like credit cards, payday loans, and installment loans paid off, you can start building a larger emergency savings fund.

Is it ever a good idea to use credit cards as an emergency fund?

Unless it’s a life-altering kind of situation, it’s best not to rely on credit card debt or a line of credit in place of emergency savings. Convenient as they are, there are quite a few dangers of using credit cards for emergency funds.

Obviously, there’s the high cost of compounding interest. Rolling over your balances from one month to the next leads to more interest payments.

And, if you treat your cards as a source of available funds, like an ATM if you will, you’re likely to get into the habit of just charging it, and rebuilding your debt balances higher again.

You can use a credit card to pay for emergencies so long as you can pay off the entire amount before interest applies. That means paying it down before the next billing cycle starts.

Yes, I know that many bankers will tell you if you have assets like a home, you can use a secured line of credit or HELOC as an emergency fund. I still think it’s a bad idea. An emergency savings fund is for when you’ve lost your income. That makes keeping up with mortgage payments hard enough. Now you are going to be using debt to pay for all your other living costs. Once you return to work, you are facing much more debt.

Relying on credit card debt or a line of credit just means you can continue the model of spending today, rather than saving for a disaster tomorrow.

In summary

As I said, the answer is not as simple as pay off debt or save for an emergency. You need a balance between savings and debt repayment that protects your future finances.

If faced with the dilemma of paying off debt vs an emergency fund, my recommended steps would be to:

1. Create a small slush fund for unexpected living expenses, say $500 to $1,500 while paying at least the minimum on all your debts.
2. Put all excess cash towards paying down high-interest debt next.
3. Once your credit card balances are paid off, start building an emergency fund for catastrophic events that can lead to income loss.
4. Once you have 3-6 months in liquid assets (like in a TFSA), pay off other consumer debt like your car loan.
5. After that, save more, pay down your mortgage, and invest.

Again, every situation is unique. How long it will take and how much you can save will depend on your personal circumstances. But if you want to avoid the roller-coaster of being thrown deeper into debt, you need a plan that focuses both on debt reduction and disaster recovery.

The post Emergency Fund or Credit Card Debt? What’s the Better Choice? appeared first on Hoyes, Michalos & Associates Inc..

Chris explains that many people in the creative world avoid thinking about money because they believe they are just bad at it; they just don’t get it so they think managing their finances is something they can’t do. As ‘money misfits’ they don’t feel they are part of the financial conversation. The terminology around money is foreign so they don’t connect with the language.

I think this lack of understanding the words around finance probably applies to most people and goes a long way to explaining why personal finance is so hard for many Canadians. But for someone working in the gig economy, the practical challenges of managing their money are doubly hard. They often work multiple jobs and have multiple income streams. Or, their work is seasonal, and so they have to stretch their dollars over the months that they don’t work. Using a traditional approach to budgeting and spreadsheets just doesn’t work. You can’t just take last years income and divide by 12 for a monthly budget when you worked one project last year and may have a different project, movie or contract next year and maybe a big gap in between.

Budgeting on a variable income

If you are self-employed, work in the gig economy or work on commission, you can’t accurately predict what income will be coming in each month. That means starting with your personal expenses, something you do know. You know how much your rent will be, your food and other personal costs. Add all this up and figure out how much ‘income’ you need each month to cover these costs.

Next, build a cash flow system that involves paying yourself a salary, regardless of what your business or project income looks like. Since you don’t have a regular salary, you have to create one for yourself.

Take the 25, 25, 50 approach. 

If you’re not sure how to start organizing your cash-flow, Chris recommends a strategy of allocating all your cash inflows into 3 different buckets:

1. 25% to cover your potential tax liability,
2. 25% for your business costs,
3. 50% towards your personal and living expenses like rent, groceries, gas, and other bills.

Obviously these percentages can be adjusted based on your personal situation. If you have higher business costs to earn your living (like flights costs and purchased services like Chris does) then you might need to put away more to cover business expenses.  If your personal expenses are higher, you’ll have to allocate more there.

Chris even suggests opening a different bank account for each of these groups. That’s the concept of paying yourself a salary. You put money aside for taxes & business costs, the rest goes to you to cover your living expenses.

What about debt repayment?

If you do have debts you need to repay, Chris recommends that your first step is to stabilize your cash flow using a system like the one above. You need to find out why your debts keep growing so you can take steps to stop debts from growing even more. Chris suggests it’s OK to keep paying the minimum on your debts until you get your cash flow in balance and then you can start planning on paying off more of the balances each month.  It’s better than living on the borrow-repay-borrow cycle that doesn’t address the underlying problem which the need to restructure your life (and money) so debt doesn’t keep coming back.

Read More: Self Employed: Dealing with Business Debts

For more details on how to handle variable income and to hear Chris’s story, tune in to the podcast or read the complete transcript below. 

Additional Resources

• Chris Enns’ Website
• Chris Enns’ Twitter
• Full Video on YouTube

FULL TRANSCRIPT – Show 237 Managing Money on a Variable Income

Doug:                Before I have a guest on the show I arrange an introductory phone call with them so I can explain what the show’s about so we can pick a topic to discuss. So I did that and today’s guest said he would be out of town so it would be easier for him to phone me so I said fine and he called me and I asked where he was calling from and he said Paris. And I said oh that’s cool I live close to there, I’ve got an office in Brantford, it’s only a few minutes away. And he said no, Paris France. And I said what are you doing there? And he said he was working. And I said but I thought you were a financial guy. And he said yeah but I’m also an opera singer.

                          So today for the first time ever we’re going to talk money with an opera singer who I am pleased to report jumped on a plane and is now sitting in my office here in downtown Toronto. So let’s get started. Who are you and other than being an opera singer, what do you do?

Chris:                Other than being an opera singer I’m Chris Enns and yeah, I’m an opera singer and I split my time kind of between the opera stage and financial planning. So advice only financial planning, specifically for people like me, for creatives for people that are kind of outside the norm a little bit, whose finances or way they think about money may seem a little bit different but I’m Canadian, I grew up in Manitoba on a farm. So farm boy opera singer, financial guy, classic track.

Doug:                That’s right, I’ve never had that exact person on this show.

Chris:                It’s strange you haven’t found somebody, we’re everywhere.

Doug:                So this is cool and I was going to get Chris to sing the theme song in opera but we don’t actually have a theme song so next episode that’s what we’re going to do.

Chris:                I’ll work on it, yeah.

Doug:                So tell us the story then because I don’t have a lot of farming, opera singing financial guys. I know you’ve got your level one certification in financial planning from FPSC, which of course is the financial planning standards council and you’re working towards your designation as a certified financial planner. We’ve had a number of CFPs on the show in the past, you know, Sandy Martin and others. But obviously you’re also working as an opera singer. So tell me the story, how did these two things come together?

Chris:                So opera singing is my background and I started taking school, going to school for opera singing oh yikes, never count the years, right? It always feels – want to say 10 years but I know I’ve been in Toronto for 10 years and I was studying before that so that’s not the answer but so for a long time.

                          So I did my undergrad and my masters work in opera and was nothing to do with money. I hated, I didn’t even hate thinking about money I just didn’t. Like many people in the creative sphere I avoided thinking about money as much as possible and so I only started thinking about money when I started making mistakes. And, you know, some of them you could kind of sweep under the rug for awhile but eventually the mistakes pile up.

Doug:                They come back and get you.

Chris:                They really do. And so they kind of got to a point where I really had to look at the monster under the bed and actually face those things. And the big surprise for me was that these basics – because so many of the words, especially for artistic people oh, you’re just not good at money or money’s just – you just don’t think that way. And you get really used to this idea not only will you never have money but you’re just not responsible for thinking about the financial side because it’s just not for you. It’s not something that you need to worry, not need worry about but your brain isn’t – it doesn’t work that way.

                          And I found when I started facing it, it was the exact opposite, that learning the basics was really empowering and getting a sense of my basic cash flow and starting to pay off my tax debt that was the thing that kind of broke the camel’s back, was really something I could do and something that I could take over this thing that was really scary for me and make it something that was in my control and that I could actually, you know, drive the boat.

Doug:                Well and that’s why I wanted to have you on the show because I think you’re an example someone who’s, you know, I guess the word today is the gig economy. So you don’t have a standard 9-5 job at a big corporation that you’re going to be there for the next 30 years. You’re not going to get benefits and a pension and all the rest of it. So you’re in Paris for a couple of months, you’re back here, you’re going back out on the road, whatever.

                          So I mean there’s obviously a lot of specific challenges you face in that environment. You mentioned taxes, that’s an obvious one. So what are the challenges that someone who, like both in the gig economy but also someone who is I mean a creative because I guess there’s different sides of our brains, right?

Chris:                There’s at least two of them that they tell us about.

Doug:                Right so I guess the I love spreadsheet side is different than the artistic I’m good at music and art and that sort of side. So what specific challenges do you see in your world either on the creative side or the gig economy unstable employment, sporadic employment side when it comes to money?

Chris:                So there’s a couple of things. On the practical side I think that anyone who has multiple employment streams or works in the gig economy or balances a couple of careers, has unpredictable income streams, and that can come in a whole bunch of different faces. Income streams, it’s interesting because you put it under one big umbrella like variable income but variable income can look so different for different businesses.

Doug:                That’s why they call it variable.

Chris:                Exactly but, you know, you can’t – I can’t explain opera. We often book two years in advance or a year in advance so that’s different than working with clients my other side where you’re bringing people in and the cash flow looks totally different. And so you put it under one spectrum but that’s really practical, the idea of dealing with taxes, the idea of running, you know, a small business, even if you’re not aware you’re running a small business, so business inflows and managing that and separating that out from your personal inflows and just kind of the alchemy of that. But I think those are the practical kind of things that we all have to deal with. On the creative side, and for lots of, you know, I deem the word sometimes money misfits,

Doug:                Money misfits.

Chris:                It’s kind of a bigger umbrella for people just don’t feel like they’ve been part of the financial conversation. And I think that one of the biggest issues that they face is the communication’s problem. They don’t connect to the language that – the language of money and the way we talk about money in the financial sphere or just generally they don’t connect to that, they don’t connect to the acronyms, they don’t connect to the spreadsheets. But they don’t necessarily also connect to some of the underlying words like wealth and, you know, the idea that oh, I need to get as much money as possible. Lots of creative people just don’t think about their finances that way.

                          So if you’re always framing things through the accumulation of wealth, as we often do in the financial sphere, that’s going to say well, that’s not for me. If that’s what that is, investing in different things and making as much money as possible, I’ve made different decisions in my life. But it’s not, money is just a tool that we use to build the lives we want and so the communication issue is a big part of it.

Doug:                And why is that? I understand you speak English, I speak French, we’re talking a different language, you’re opera, I’m rock and roll kind of thing. I get that. Is that what is it, we’re just using different words or is it something deeper than that?

Chris:                I think that your opera rock and roll thing is a metaphor that I really like. You know, in the arts we’re telling the same stories.

Doug:                And I look like a rock and roll guy don’t I? Come on, there’s nobody more rock and roll than me, that’s absolutely right? So what is it then?

Chris:                It’s – I think that’s one of the interesting problems to solve. And I don’t think we’re trying to solve it in the financial sphere enough. I think that too often we say the same words over and over and then say if you don’t understand this you have to change or, and people hear this whether it’s being said or not, and it is being said sometimes, you’re dumb if you don’t understand this. You’re bad at money if you don’t understand this.

Doug:                So is there an example of a word that is – I mean I know in my world I never use the word creditor when I’m talking to people. Because if I ask someone on the street what’s the difference between a creditor and a debtor, it’s like I don’t know. Okay, well a creditor is someone you owe money to, the debtor is the guy who owes the money. But I never use those words I just say tell me about the people you owe money to, which is better than saying the word creditor. So it’s making it yeah in simple easy to understand language. Is that what you’re talking about or is it something more than that?

Chris:                Not only that. I think that’s part of it. I think it’s also just about trying to – what I tell people a lot is that in order to be good at your money you don’t have to change everything about who you are. Especially I talk to people who are incredible at their crafts, you know, they’re dancers, they’re writers, they’re singers. They’re incredible at something; they know how to develop a technique to be great at something.

                          What they don’t know is how to develop a financial technique. And so what I talk to them about is saying okay, especially I love working with singers because I understand that technique so well. I can express in that words being this is what you do here, it’s the same in money, this is what you do here, it’s the same in money. And when I’m talking to, especially for story tellers, which is a big umbrella of all kinds of people who are communicators and trying to communicate things and trying to say okay, what’s the most important thing? It’s not the words and the grammar, it’s knowing what story you’re telling and to making sure when I’m talking to clients always working first from a point of what are you trying to do, what is your money for?

                          Before trying to solve debt problems, before trying to figure out retirement, we’re spending a lot of time talking about intention and this is something we do in the financial industry all the time, I’m not making – this is not revolutionary idea from Chris. But making sure that people are grounding that sense in themselves and relating saying okay, this is just like your technique, this is just like something you do well already and this is how we’re going do it and then we’ll add a spreadsheet, versus starting with the stuff that they’re not good at and getting overwhelmed by that. We add the acronyms to what you want, we add finance to the personal, not the personal to the finance. And I think that’s what kind of I’m talking about.

Doug:                Yeah, you’re not trying to fit a square peg into a round hole I guess. So your website it’s called ragstoreasonable.com and I’ll put a link to that in the show notes and like you just said you help creatives and as you said money misfits, so what – how do you define a money misfit then, what does that word mean to you?

Chris:                I think it is around this miscommunication. It’s just people that feel left out of that financial conversation for whatever reason, whether it’s they Googled how to make a budget and the first line was take your income and divide it by and they go I don’t know how much income I’m going to make. So whether it’s that or I remember the first time I went into a bank and I wanted to invest in my TFSA, I was feeling really confident, I was starting to get control of my money.

                          And the woman across the desk wanted me to invest my tax fund, the money that I had set aside for taxes for the year. And she was like oh, just no but you’ve got $6,000 here and you can put that in your TFSA as well and I was like I don’t think – I didn’t have the confidence yet and I was like I don’t think that’s what I should be doing. It’s not, I’m not saying it as a fault, although I do think the financial industry should try harder to find new ways to communicate with whoever’s in front of them, but they just have not necessarily clicked with what’s being put out there.

                          So trying to create a space for the people on the outside that aren’t engaged in the general financial conversation, they’re not asking the questions that everybody else is asking and they’re not – they don’t have a place to go for support. And so trying to create a place for people like that to come and start a conversation.

Doug:                So you’re saying that banks and maybe traditional financial planners start with the tool well this is a TFSA, this is a budget and we try to ram it down your throats rather than the other way around. And I guess this is the difference you see dealing with, you know, creatives or money misfits, is start with the person, what language do you speak, what you understand and then work from there. So really what you’re saying is, you didn’t use this, you didn’t use this word but you’ve got to start with the goal, the plan, something like that is that really what you’re saying?

Chris:                I think that’s a big part of it. I think that’s such a great – this is what I found in the advice only financial planning world, is that’s the kind of financial planning that a lot of people are doing for a lot of different voices. And so, you know, people are doing it for engineers and doctors. And, you know, I like working with engineers and doctors, I don’t speak their language as well. I always have a hard time working with engineers because I’m more likely to talk about how do you feel about this and how are you connecting to this? I’m more of a feelings, emotions guy, I care about that and they want to make sure that decimal is in the right place and I don’t care about the third decimal place. So there’s places where I don’t speak the right language either. I think that so much of the financial industry is product driven, right?

Doug:                That’s where they make all their money.

Chris:                And so that’s a big problem.

Doug:                So what types of careers do you see that you’re helping people? Obviously you probably have a few opera singer clients but what are some of the other, you know, non-traditional careers, non-traditional job paths that you’re helping people with?

Chris:                Lots of actors. I’ve been involved with a partnership with ACTRA Toronto for the last year and so there’s been lots of actors and people in the film industry because it’s not just the acting side, the tech side, anybody who’s connected to that, the stunt side, that whole world. I work with some fitness professionals who have, you know, not necessarily that creative sphere but their income is more client based. I work with some more self-employed client based people that run, you know, online business, kind of the connections that – but it’s amazing how putting that title money misfit opened up to a lot more people, writers, dancers.

Doug:                Yeah and there are so many more people who don’t have a traditional job.

Chris:                What is a traditional job?

Doug:                What is a traditional job, yeah that’s a very good question. They are few and far between. The number of people out there in the world who have – are going to be at the same job for 30 years, are going to move through the ranks and have a pension when they are done, is okay I don’t know 5% of the economy, maybe if you’ve got a government job or something and that would be about it.

                          So, what then is the approach for somebody who has either multiple streams of income or more likely many different streams of income, so all those people you just talked about, you know, anybody in the entertainment business? You’re right in this office, we’re at Yonge and King and for people who are just watching we’re using a different room than we’ve used before, just trying that out. But here at Yonge and King we get a lot of you just described. I didn’t realize how many different layers there were to the entertainment word. Because yeah, we all see the actors but they’re a small percentage of all the people, the technical people and writing and all the rest of it.

                          So what is your advice for people in that world who I’m going to be working on a project for two months and then I’m going to be off for two months and then I’ve got another one and back and forth, back and forth. You can’t do traditional budgeting where every two weeks you do this, so what kind of big picture advice do you give people for very sporadic or untraditional sources of income?

Chris:                Yeah, it’s harder. The truth is it’s harder

Doug:                And maybe that is the simple answer it is harder.

Chris:                I think it is. It seems unhelpful but at the same time it is helpful for a lot of people to know that they’re not missing something. You’re not bad at your money. This is something I tell to lots of people. You know why this feels hard, because it is hard. And because there’s a lot of language around finances, which is just make a budget, just sit down and make a budget like it’s a really easy thing. And it’s not easy when you have normal income either. It’s a difficult process that people white wash over far too quickly.

                          But when you’re income is variable it’s even harder. I think for me what I always start working with the clients here not only making sure you’re really set in what you want but the second big question we deal with is not income, it’s expenses. It’s the better you can know your expenses, you know you can understand your income side. You can’t start budgeting when your variable income from an income perspective. I know that the conventional advice often for self employed people is take your last two years and divide that by 12 and use that as a starting number, if your business works that way and is pretty consistent, great. If you work in the film industry maybe you were on a big show last year but you don’t have any potential work this year, don’t do that unless you have a reason to do that. Start from a place of what do you need?

Doug:                So I look at my expenses and I see well my rent and my groceries and it cost $2,000 to live and then what do I then do with that information?

Chris:                For sure. So what I work with people one of the biggest things I work with people is coming up with a cash flow system so that involves building a system so that you’re paying yourself a salary. So it’s basically you’ve got an extra step, you don’t get a regular salary you make a system so you’re paying yourself a regular salary. There’s no just in the sentence because it takes some time but the biggest piece of that puzzle is what do you need to pay yourself to make that work?

                          A lot of the work we do there too is separating out business and personal expenses so you can start seeing lots of sole proprietors don’t see any separation between who they are personally and who they are as their business and start putting those in two different piles. So you can start to make a structure so that when money comes in, whether it’s a big month or a low month you can start smooth that out so you’re getting the same amount that hits your personal account every month.

Doug:                So let me see if I understand what you’re saying here then. So I’ve decided to go into acting, I’m going to give up this whole accounting thing.

Chris:                I think you’re a natural.

Doug:                Oh yeah, I’d be great at it. And singing too, you all want to hear me sing that’s for sure. And so I get a job working on that big show at the Ed Mirvish Theatre, whatever that show is and I’m going to be on it for three months, okay? And so I’m going to make I don’t know how much you make on the show but I’m going to make good money. And then for a couple of months after that I’ll, you know, I’ll take a break I guess and then get the next whatever.

                          So I know that it’s going to cost me a couple of grand a month  to live because I’m an actor now so I’m bunking with four other actors and keeping my cost down and all the rest of it. So I assume what I need to do is take the $6,000 a month I’m making and put it into an account because each $6,000 I make I know buys me three months of runway.

Chris:                It does and it doesn’t right because we don’t – we’re making gross instead of net. So we’ve got another layer. So when $6,000 comes in, this is what I’ll set up with my clients, $6,000 comes ins and we’re breaking it up into three pieces. We’re putting 25% away into a tax account, we’re putting 25% away into a business account because you need to spend a certain amount to spend of every dollar to make the next dollar. And then we’re putting 50% into your personal account.

Doug:                So as an actor what expenses am I going to have?

Chris:                This is one of the most frustrating things, especially as an opera singer I’ll speak to being an opera singer.

Doug:                Let’s say I’m going to go into opera.

Chris:                Just because I know the expenses really well and because it’s a really high input business. When I want to do an audition as an opera singer, nine times, I shouldn’t say nine times out of 10, often it’s in New York I have to fly myself down there, I have to put myself up, I need to hire a pianist to play for me for that audition. So I can be putting out between 500 and $800 to do an audition that 100 other people are going to.

Doug:                So I fly to New York and how long is the audition like 10 minutes, 15 minutes, an hour.

Chris:                If they like you, five minutes if they don’t.

Doug:                So I phone around, find someone to play the piano for me, I guess I probably have to learn the music.

Chris:                Yeah, all that prep work you don’t get paid for.

Doug:                Yeah, unless it’s some opera I’ve done 15 times. And I’ve never done an opera so I probably have to learn it.

Chris:                You probably have to train a little bit.

Doug:                So I may – yeah, I may go on, well I will go on many auditions.

Chris:                Voice lessons because you need to get ready, you need to work with a language coach as well opera is not in English, or some opera is in English, most of opera is in Italian, French, Germany, Russian, Spanish. You need to learn that, you need to get that work, you need to be going to school, you need to be networking with people, you need to be going on a ton of auditions that you don’t get because this is just the same as networking in business. You don’t get the first job that you go for.

Doug:                Yeah, any sales person has to make many pitches to get one sale.

Chris:                Exactly.

Doug:                And so when you’re singing in French or Italian opera, do you actually understand what you’re saying?

Chris:                You have to understand what you’re saying at a certain level. So what they teach us to do is even if you’re not fluent they teach you how to cheat. So we take diction courses and we break down the language into the international phonetic alphabet so that you can learn the sounds. And then you translate every word and you know, even if you don’t speak French or you don’t speak German, you know this German and you know what you’re expressing.

                          You know, if you want the kind of analogy I make with my clients all the time this is exactly like finances you don’t need to figure out the whole language, you need to figure out the sentence that you know how to speak. So it’s like this is the language in front of you, you don’t need to know every acronym, you don’t need to know every investing strategy, you need to understand your investing strategy, you need to understand the RSP that you have. That’s all. You need to understand why you’re doing that. That makes you good at money.

Doug:                Got you. Now you hit on a key area, which was taxes. And so what you said was so I’m making $6,000 at this show I’m doing and it only costs me $2,000 to live but I didn’t really make $6,000 because at the end of the year when I file my taxes I’m going to owe money. So your strategy for dealing with that is –

Chris:                Right off the top right away.

Doug:                Literally have a separate account and that’s where I dump it into.

Chris:                Often in a separate bank.

Doug:                So it’s totally out – so I can’t touch it. Would you ever recommend to a client just send the money to Revenue Canada?

Chris:                Some people do, yeah.

Doug:                So in effect you’re making instalments.

Chris:                Some people do, some people – I’ve had clients just kind of sending it straight there all the time. It depends on the personality, some people if they see that money in their account they’re going to raid it so you put it in a separate account. Some people don’t want to – you know, I think the majority of people want to spend as little time thinking about their money as possible.

Doug:                Yeah and I don’t want to be giving Revenue Canada money early and if I work six months and then I don’t work six months maybe I don’t owe as much in taxes.

Chris:                This is why I don’t get along with the engineers because in my mind I say I don’t really care about giving money early to the tax debt if it’s going to mean you don’t have tax debt come tax time. I think that that cost, I think it’s something that you need know about but I think that that can be worth it. I don’t have a lot of stress about that.

Doug:                I totally agree and anybody who’s self employed, and I’m much more likely to be working with people who are in the construction industry for example, so very busy in the summer, not so busy in the winter. And I say to them look you know that over the course you’re going to make this much, that puts you in this tax bracket so every dollar you make, that’s how much you’re going to have to give to the government.

                          So why not every pay you get during the summer if you’re self employed and it’s not being withheld, just send it right to the government. And then it’s gone and if you overpay they’ll give it back to you. And yes, I understand if you put it in your own TFSA you could earn interest on it at .5% and, you know, you’d have an extra 50 bucks at the end of the year but this way nothing can go wrong. So I’m a big believer about that.

                          Okay, so let’s think this through here. I mean obviously I’m a chartered accountant, a CPA, which is the most traditional kind of job there is. Since graduating from university, I was thinking about this the other day, which was like 32 years ago, of course I was a child prodigy, graduated at the age of 7, I’ve had exactly three jobs, three jobs. I was at KPMG for 10 years, big accounting firm, then I spent less than two years at PWC and I said forget this and then started Hoyes Michalos, which was about 20 years ago.

                          I have had zero firsthand experience at juggling multiple jobs and income streams and all the rest of it. So, number one is it stressful and number two is it, you know, kind of better than a traditional job because you’ve certainly got lots of stuff going on or is it oh no, everybody if they had a choice would love to be an accountant working at the same big accounting firm for 20 years?

Chris:                I think yes, it’s stressful but I don’t think that necessarily means that it’s bad. It’s like anything else, there’s so much nuance in what you want your working life to be. I think that it’s very interesting right now. There’s a couple of things happening, I read something the other day that was just talking about how much we romanticize this idea of working for yourself a lot. And so that’s definitely a factor. Oh freedom, you can do whatever you want, you can work from home in your pyjamas every day, the whole day because you don’t have set boundaries on yourself and that’s really difficult. And enforcing that structure on yourself is really hard. It’s not as simple as that.

                          And it’s – but at the same time it’s not as simple as saying 9-5 or stable of whatever that looks like, is the answer, is the preferable for most people. I think that people are really thinking about what they want from their work. I think that in the same way that people are rethinking what they want to kind of spend on as far as wanting to connect with the rise of socially responsible investing, just making more conscious choices about what they want their money to go towards.

                          I think people are thinking about how they want to earn and I think one of the most important words that is kind of bouncing around is the idea of flexibility and that’s worth a lot. That being said that doesn’t have to be found in a self employed world or in a multiple income world and often that’s not flexible at all. You know, you’re just kind of juggling to make ends meet.

Doug:                So if I said to you I’m starting this new opera and it’s going to run for 10 years, like I don’t know, Cats, that was a think it wasn’t an opera but it ran for a long time or Come From Away with probably be going forever. So, would you rather be on that show for the next 10 years you know exactly what you’re doing, exactly what show you’re doing, you could live in the same place, not change or would you say you know what, I kind of like three months in Paris, a couple of months in Toronto, like what would you pick?

Chris:                I like the variability. That’s what I want but I know artists that would love that kind of stability. It comes with a trade off, it always comes with a trade off. In finances aren’t we just talking about tradeoffs all the time? I think that what we need to get better at is getting clear about what the trade off is. Because I think that it’s really pitched this idea of oh, just do this, you know, just be on your own, this is so much better than going into that job every day. And it’s not that clear, it’s getting a clearer sense of what that can look like.

                          The problem is, is that it looks really different when you’re balancing four restaurant jobs so that you can audition and maybe get an acting job versus balancing three careers – three kind of things that you own, that you’re more in control over and more in control of your shifts but that’s still stressful because you’re more in charge of kind of bringing in that income and making sure you’re hustling to have things – keep the lights on, right?

Doug:                Yeah there’s pros and cons to each. So okay this show is called Debt Free in 30, we talk about debt. So when someone comes in to see you, you know, one of your opera singer buddies or whatever, and they’ve maybe incurred a bunch of debt because maybe I’m going on auditions and doing all this – but now I’ve got some kind of money coming in, how do you advise someone on how to make a plan to get out of debt when you only know for the next couple of months what your income is going to be, you can’t project it months and years forward? Is there any kind of structure you can put to that or how do you do it?

Chris:                Completely and it’s something that I work with a lot of people with. It’s a combination of two things. One stabilizing your cash flow, it’s exactly what we were talking about before, the idea that you need to figure out a lot of the time our debt comes from not accounting for the costs that we know about. Sometimes it’s a surprise thing, a tree falls on your car, you know, you can only do so much. But you can do things to prepare for auditions, putting away money for business. You can do things to prepare for Christmas, it’s not business but it’s the thing that hits you every time.

Doug:                And I can tell you December 25th, that’s when it’s going to be this year so you can mark it down. Okay, so number one, stabilize cash flow.

Chris:                Stabilize cash flow is a really big reason but that’s really a symptom of the most important thing which is stop looking at the number, look at what caused the debt. And your first step is not to pay off this debt, it’s to stop more debt from happening. And so it’s about looking at the – $20,000 of debt, $30,000 of debt isn’t the same for everybody.

                          And so it’s not just about coming up with a payment plan, it’s about trying to figure out how you can restructure your life and restructure the way you do things so that debt doesn’t happen again because people – so many people, you must see this all the time, they’re caught in the cycle. And this is so bad for variable income earners because you have a $10,000 month and you put $9,000 onto the credit card. Amazing, I’m paying off things and you’re using it next month again and so it goes back up, back up, back up.

                          You need to stop the cycle first. So that I would rather, I tell clients all the time be like we’re going to pay minimum payments on your credit card for awhile while we stabilize things and then we’re going to start making payments one way. I would rather $25 goes on your debt over and above your minimum payments and doesn’t come back, than this thing that you’re doing right now.

Doug:                Giving $200 and then borrowing 175.

Chris:                It’s so – not only from a financial point of view it doesn’t help, it’s so demoralizing. It’s so hard if you feel so trapped versus slow, steady sustainable progress. That’s the only solution. And what comes from who you are and where that came from more than, you know, the numbers and the interest rates it’s important but, you know, that’s the last step.

Doug:                You’ve got to stop the bleeding first.

Chris:                Stop the bleeding first.

Doug:                And then you can work on stabilizing the cash flow. And obviously as you go through that process, if it turns out well, I’ve got $50,000 worth of debt and I have no hope of paying if off, that’s when you’re coming in to see me.

Chris:                That’s when I’m sending people to see you.

Doug:                Yes because that’s all you can do but at least you’re realistic about what it is you can do. People in your line of work well, I might end up getting up a really big show and I may end up having this all cleared up in six months. So I guess knowing where you stand is critical.

Chris:                But that hope can be really – that’s a difficult place to be in because people push it and people push and people push it because tomorrow I could get a movie and I could pay off this debt in one go. But the truth is people always think things will change when they get more money but more money doesn’t change behaviour, it amplifies current behaviour. And so you have to change your habits now, you have to setup an infrastructure now so that that’s why that $25 debt payment is so important because then if you get the movie you can add two zeros to that debt payment.

                          But if that pathway isn’t there you’re not paying off your debt and if you are, you’re not taking care of your life. And so you’re going to end up at risk for more debt. And at a certain point the biggest cost of debt in so many people’s lives isn’t the financial cost, it’s the weight that they’re carrying all the time. They’re carrying around that shame, they’re carrying around that guilt. And it’s affecting the way they do their jobs, it’s affecting the way they live their lives. And sometimes it’s like go through the consumer proposal now. If you get a great gig, okay.

Doug:                Pay it off then.

Chris:                Pay it off more quickly, exactly. Just start moving this needle forward and stop having the spectre looming over every audition. You know what makes an audition go well, going into a room and saying I need to get this otherwise I won’t be able to make my rent next month.

Doug:                Yeah and you almost for sure won’t get it then. It’s a karma thing. And I see that in every line of work, that okay I’ve been laid off so I’m applying for that job at the accounting firm or the engineering company or the construction company or whatever. If I go in there in the good frame of mind I get the job. I have had tons of clients over the years who have been down, they do the proposal, they do the bankruptcy, whatever, they get rid of the debt and then three days later they get a job. And they’re like I don’t get it, I’ve been trying for six months. Yeah, but you finally took the weight off. I think that’s excellent advice to end it. How can people find you?

Chris:                You can find me at ragstoreasonable.com. All my information’s there about the kind of people I work with, what that work looks like. There’s a blog, I’m even part of a podcast called Because Money.

Doug:                And how can they find that?

Chris:                becausemoney.ca. With Sandy Martin and John Robertson and you can find me on Twitter and Instagram at @ragstoreasonable. My big focus really is providing accessible one on one help and so I run monthly free office hours, three hours of free office hours on my site. You can sign up for those for free. They’re all online, my practice is online so I can talk to people all around the world. Those are no strings attached, I’m not going to try to talk you into anything, just for a chance to talk out any things that are on your mind.

                          I also do pay what you can financial planning for lower income people where I’ll subsidize the remainder of what you can’t pay. Sometimes there’s a bit of a waiting list but when that can happen – because in my practice I also donate 10% of everything that people pay to a fund that helps people who can’t afford financial planning, afford financial planning. So you can find all those details on my site at ragstoreasonable.com.

Doug:                Excellent, perfect. Chris, thanks for being here.

Chris:                Great to be here, thanks so much for having me.

Doug:                That was awesome. That’s our show for today. A transcript for today’s show notes, including a link to Chris’ website and twitter profile and everything else can be found at hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post Managing Money on a Variable Income appeared first on Hoyes, Michalos & Associates Inc..

One of Larry’s biggest messages is that if you understand the cost or fee structure of the financial products you are using, you can choose options that lower that cost.  By keeping more of your money, each and every year, these seemingly small savings build up over time and can have a significant impact on your long term finances.

Take advantage of all six of these factors, not just one, and you will beat the bank.

To do so, here is a good game plan:

Pay off debt before anything. For debt, Larry’s formula works too, just backwards: The more you owe, the longer you owe it, and the higher your interest rate is, the less you have to build wealth in the future.

Your first priority, even before you start making a savings plan, should be to eliminate high-interest unsecured debt like credit card debt. The sooner you do, the more money you’ll be putting in your own pocket instead of the bank’s. The longer you take to pay off your debt costs you money in terms of both interest and future savings. Initially, compound interest works against you when it comes to debt, meaning you will pay more interest in total the longer you take to pay off a loan. If you focus on getting out of debt sooner, you not only save on interest, you allow yourself more time to invest those savings.

Learn More: The Rule of 72 with Ted Michalos

Build an emergency fund. Once you eliminate debt, the next step is to build an emergency fund to avoid having to rely on credit cards again. Don’t worry about investing until you have enough in the bank to cover unexpected expenses.

Opt for low fee investment options. After you’ve created an emergency fund, your next step can be to focus on long-term savings. If you are investing in mutual funds, investigate the fees paid to the financial advisor to manage those funds. Traditional fund fees can range from 2 to 4% of the balance invested and these fees are applied regardless of whether your investments made money or lost money. 

Consider a robo-advisor instead. A robo-advisor is a new and automated tool that can give you the same level of service and returns for managing your investments but at a much lower cost – around 1% of your balance, instead of 2 or 4%.

Another option is ETFs or exhange-traded funds.  Like mutual funds, they hold a basket of stocks similar to the market. You still get diversification but at way less cost.  You do need an online brokerage account to invest, but once you learn the basics it’s a fairly easy, and lower cost, investment option since the cost can be one-tenth of that of a mutual fund.

And remember, start early. Even small investments will add up over time.

Be mindful of taxes on RRSP withdrawals. Making early withdrawals from the plan for purchases other than a down-payment on a home or education will result in a heavy tax deduction.  The same holds true if you withdraw money from your RRSP to pay down debt. You lose a portion of your savings, and future earning power, by withdrawing from a registered savings plan too early. Larry recommends not touching your RRSP until you’re ready to retire. Instead, if you think you’ll need to regularly withdraw from your savings, consider putting money in a tax-free savings accounts (TFSA) instead.

Use Cost and Time to Your Advantage

No matter the financial situation you are in, whether you have some debt or have eliminated your debt through a bankruptcy or proposal and now want to start building some savings, use the wealth formula to your advantage. Begin sooner and opt for lower cost products and you’ll have more money in your pocket in the future.

For a more detailed look at how to beat the bank, tune in to today’s podcast with guest Larry Bates or read the complete transcript below.

Additional Resources:

• Beat the Bank book on Amazon
• Larry Bates Twitter: @LarryBatesBTB
• Larry Bates Website
• T-Rex Score – Investing Returns Calculator

FULL TRANSCRIPT – Show 233 Want to Beat the Bank? Understand the Basics

Doug Hoyes:    Lots of ground to cover today so I will dispense with the introduction and get right to it: Who are you, and what’s the title of your new book?

Larry Bates:      I’m Larry Bates; I’m a former investment banker. The title of my book is Beat the Bank: The Canadian Guide to Simply Successful Investing.

Doug Hoyes:    Beat the Bank. So we are recording this at my Hoyes Michalos office, here at Yonge and King in downtown Toronto. And you used to work for a period of time at – among other places – Scotiabank, which is at Scotia Plaza just down the street here, a couple of minutes walk from where we are.

                          I would like you to start by telling this story that you tell in your book, that day in 2013 when you were sitting at your desk up there, Floor 68 of the Scotiabank tower there, Scotia Plaza, you got a call from your sister Mary. Tell me about the call, what happened, and what was going on with Mary?

Larry Bates:      So Mary said to me, “Hey, Larry, all we hear about is how well the stock market’s doing, but this bank mutual fund that we own hasn’t done very well and we just don’t understand why, can you have a look? And so I googled the fund, and I said to my sister, “Do you realize you’re paying 2.3% in fees?” And she said, “We’re paying fees?” And I said, “Yeah, 2.3% a year”. And she said, “Oh, well you mean 2.3% of our returns, right?” And I said, “No, no, 2.3% of your total amount invested every single year whether the market goes up or down, which means if you’ve owned this fund for the past 15 years, 30 or 35% of your money has been stripped away in fees.”

                          And Mary was … she was shocked, and she was upset. Like most Canadians, her retirement savings are precious to her, every penny counts.

Doug Hoyes:    Well, let’s just talk about how big a number that is, because 2 to 3% doesn’t sound like a big number, and I get this in my business all the time, “Oh, mortgage rates went up from 3% to 4%, that’s only 1%, it’s not a big number”. No, when something goes from 3 to 4%, that’s one over three, that’s 33%; it’s a massive number.

Larry Bates:      Yes.

Doug Hoyes:    So 2% to 3% of everything I’ve got invested. So I’ve got, let’s say, a $100,000, that means I’m paying could be $3,000 a year.

Larry Bates:      Yeah, she was paying 2.3%, so on $100,000 that would be $2,300 a year. But the bigger issue is – and people don’t do this – they don’t multiply that by say 20 or 25 or whatever, they look at the one year. Oh, 2% doesn’t sound like much but if you invested for 20 years and you pay 2% a year, that’s 40%.

Doug Hoyes:    Yeah, it’s a huge number. And I’m asking a question that there’s no answer to, but that’s what I do here: How much would a typical mutual fund earn in a year? So put the 2.3% in perspective for me.

Larry Bates:      Well that depends on the mutual fund, but say it’s a balanced mutual fund that’s invested in a mix of stocks and bonds you might hope that over time the average return on a mutual fund might be 6% or 7% before fees.

Doug Hoyes:    Before fees.

Larry Bates:      Now, mutual funds invest in stock so the value goes up and down, it can go up and down dramatically, so you might never have a 7% return in a given year, but on average of the ups and downs you might average 7%. So let’s say you do average 7%, but your fees knock your return down from 7% to 4.7%.

Doug Hoyes:    That’s a huge number then.

Larry Bates:      So 2.3% in fees deducted, so that’s a massive drop. And it has a huge impact; it’s a deceptively high impact because of the loss of compounding. Compounding at 7 basically produces double the return of compounding at 4.7.

Doug Hoyes:    Yeah, it’s a huge number.

Larry Bates:      People don’t see that, yeah.

Doug Hoyes:    Yeah, if you start out with $100 and I start out with $110, I’m going to be way ahead of you 20 years from now because I am compounding on the whole $110, not the $100.

Larry Bates:      It’s the rate that drives the differential. No, no, see if you start with $110, I start with $100, and we both grow at the same rate, you’ll still end up with 10% more than I.

Doug Hoyes:    Okay.

Larry Bates:      Let’s say you’ll grow to $220, I’ll grow to $200 like the relative … you’ll still have 10% more than I. But if you compound at 7%, start with $100 and compound at 7%, I start with $100 and compound at 4.7%.

Doug Hoyes:    A huge difference.

Larry Bates:      You’ll end up with double the return that I have.

Doug Hoyes:    All because of that.

Larry Bates:      It’s the compounding of the rate that drives it.

Doug Hoyes:    Now, so my first thought, and I’ve read the book and I totally understand what you’re saying, but okay I don’t have a whole lot of choice, dude, like if I want to buy a mutual fund I’m going to pay 2.3% or 3%, or whatever, and I am not sophisticated enough to be knowing which Bitcoin stock I should be buying so I want to have someone else handling it.

Larry Bates:      Yeah.

Doug Hoyes:    So that’s kind of the price of admission, if I want to get my car fixed I’ve got to pay someone, it doesn’t really matter what they’re charging me, that’s just the cost of admission.

Larry Bates:      Well, Doug, I would say that was the case 20 years ago, maybe 10 years ago, but today investors have a much wider range of choice of much lower cost investment products and services. So there is a better way. And this is really the main message of my book and how you can beat the bank and end up with a larger retirement nest egg, which is the point: Take a little time to learn investment basics and you’ll be in a position to make a much better decision for yourself and your family, and build that larger nest egg, and take advantage of the lower cost products out there.

                          And if you walk into a bank branch, or your insurance advisor comes over to your home and talks to you about investments, the great majority of those folks they’re good people, but they sell products that are super expensive and deceptively expensive; you don’t see the cost. Take a bit of time to learn the basics, understand that, and understand a bit about the lower cost products that are out there that will build a bigger nest egg.

Doug Hoyes:    So give me an example – not with names, but conceptually – what is a lower cost product then than the mutual fund I can buy at the bank that’s going to charge me 2% or 3%?

Larry Bates:      Well, the most common product, alternative to those high cost mutual funds, are index ETFs. So what does that mean? They’re exchange-traded funds. They’re a lot like mutual funds, they’re very similar, but in order to get access to them you need an online brokerage account. That’s not that difficult if you know what you’re doing. Again, learn the basics and you could take advantage of it. And a mutual fund might charge – as we talked about – 2% a year, which adds up in a huge way over time. An index ETF fund might hold similar stocks to the mutual fund, but they will charge about a tenth of the cost, or even less. So let’s say they’ll charge a quarter of a percent a year, or even a tenth of a percent a year, which dramatically reduces your cost and will dramatically increase the share of your return you actually get to keep after fees.

Doug Hoyes:    It becomes a massive number.

Larry Bates:      Yeah.

Doug Hoyes:    Okay, and we can delve a little bit more into that, but I mean everyone who is listening to this is going: Okay, wait a minute, this is Debt Free in 30, why do we have some investment guy on, what are we talking investments? And the reason I wanted to have you on is because the objective of getting out of debt is so that you can then invest. So I’ve got two questions for you. Number one: Do you agree that it is better to get out of debt before you start investing? And let me give you a really specific question: If somebody listening has credit card debt where they’re paying 20%, would you agree that that’s probably something you need to take care of before worrying about putting money into ETFs?

Larry Bates:      Yes, absolutely.

Doug Hoyes:    So that’s pretty simple then?

Larry Bates:      20% annual interest costs on credit cards obviously is very destructive.

Doug Hoyes:    Which is an after-tax rate, because you’re paying it with after-tax income. So unless you’re got some ETF where you’re guaranteed of earning 40% a year after then it’s kind of a no-brainer question. So okay, the goal is get rid of debt, and we can get into the nuances of that, I mean are we talking about mortgages or not? Well let’s stick with the obvious situation. I’ve got a bunch of credit card debt and I want to get rid of that first. So maybe I end up having to do a bankruptcy, having to do a consumer proposal, I pay it off on my own, whatever.

                          So now I am starting off with no debt, but I also have nothing, I have no investments. So I was doing a proposal, I was paying Hoyes Michalos a few hundred bucks a month for the proposal, that’s now finished so I have freed up a few hundred dollars a month in cash flow, and so now I want to start putting it to work for me.

                          So what advice would you give someone in that position? I don’t have a lot of money yet, I don’t have, you know, 100,000 bucks there. I’m just starting out, maybe I’m a young person, maybe I’ve gone through debt and I’m coming out the other end, I’ve got a few hundred dollars a month that I want to invest. Is there anything out there that I can do?

Larry Bates:      Sure. Sure there is. Well first of all I think most folks need to build an emergency fund.

Doug Hoyes:    I agree. So don’t be worried about the stock market if you don’t have a couple of hundred bucks in the bank to cover emergencies, kind of thing, or more than that.

Larry Bates:      Or a $1,000. Yeah. So let’s assume that you’ve gotten rid of your bad debt – however that might be defined, high-cost debt – you’re stable, you’ve built an emergency savings fund, and now you’re in a position, well okay you’re saying a certain amount per month and you’re in the luxurious position of being able to invest some of that money for the long-term. I would say the easiest choice if you want to invest for the long-term – again, not for six months or a year – but if you’re looking to save for retirement which is the biggest savings and investment challenge for most people, I would suggest looking, if you’re starting out, at robo-advisors.

Doug Hoyes:    Okay. What does that mean?

Larry Bates:      A robo-advisor, it’s a relatively new type of service and there are several robo-advisors out there that offer good investment service at low cost. Go online, answer a few questions, they’ll recommend an investment approach for you, or a portfolio, or a mix of funds, usually low cost ETFs as I had mentioned earlier. And if you agree, if that makes sense for you, then you start transferring over whatever it is, a couple hundred dollars a months, or whatever your number is, and that’s a super easy way to start building an investment portfolio.

Doug Hoyes:    And I can do that with a few hundred bucks, I don’t need millions of dollars to get started on that.

Larry Bates:      Right.

Doug Hoyes:    And so now this podcast is not a commercial for anybody, we’re not getting paid by any of these robo guys to be here. If they want to pay me then, by all means, start sending me cheques, but no one’s paying me, you’re not paying to be here, I’m not paying you to be here, we don’t have some investment fund. Because a lot of the investment shows you listen to: “Yeah, we recommend A, B, C mutual fund”. Well of course this show is sponsored by A, B, C. But we don’t have any of that, nobody is sponsoring us.

                          However, I’m curious, and you don’t have to answer this question if you don’t want to, but are there specific names that are robo-advisors? Like how would I recognize who a robo-advisor is? Who are some of the big names in that industry?

Larry Bates:      Probably the biggest name in Canada is Wealth Simple; they are the folks that have been the most aggressive in advertizing.

Doug Hoyes:    And do you get paid by WealthSimple?

Larry Bates:      No.

Doug Hoyes:    Okay. So neither do I so you’re giving me- these are names that you are aware of that are legit, but they’re not paying you to say that?

Larry Bates:      No, I mentioned them because they’re the largest.

Doug Hoyes:    But if they want to send you, you know, a few $100,000 you’d be happy to talk to them?

Larry Bates:      What I would suggest is, just Google “robo-advisor Canada scorecard, or comparison, or rating”.

Doug Hoyes:    So do some research is what you’re saying?

Larry Bates:      Just search, you’ll find some independent views on robo-advisors. There’s probably eight or ten robo-advisors in Canada. The most recent major one that launched was RBC launched their own robo-advisor service. And the other banks are getting in the game as well.

Doug Hoyes:    With each passing day there are more and more of them out there is what you’re saying?

Larry Bates:      Yeah, and I think it’s a great way, sort of low-maintenance, easy way for investors, for Canadians, to begin investing. And it also can be a great service right through your investing lifecycle, from starting to invest through until you’re retired. That’s not the only choice, but it’s probably a great alternative to consider.

Doug Hoyes:    So why is it, then, that these robo-advisors are charging, you know, point one, or point two, or point three percent, and the big guys, the old-fashioned guys, are charging two point three, or three percent? Am I getting a lot crappier advice then from the robo-advisors than I would be getting from somebody who’s charging a lot more? So let me ask the question a different way. You said that a balanced fund could generate six, seven percent a year before fees; would the robo-advisor fund be generating around that level and would the standard mutual fund be –? So am I getting the same return whichever one I’m using?

Larry Bates:      I would say that, yeah, you could end up with a comparable return before fees.

Doug Hoyes:    Before fees and way higher?

Larry Bates:      But after fees you’ll likely end up with a larger return.

Doug Hoyes:    So I’m not losing anything by going the robo-advisor route, in terms of the actual mathematical return before fees?

Larry Bates:      No, you know, in terms of bad advice, I would say the bad advice comes from the great majority of advisors, unfortunately, out there in Canada, the real human advisors who would end up recommending very high-cost products which leave the investor with only a fraction of returns. That’s where I think the bad advice is. The robo-advisors, by the way, they usually recommend their portfolios [are] these low-cost GTFs which charge a tenth or maybe a quarter of a percent. Now if they tack on —

Doug Hoyes:    They’re charging a fee too, yeah.

Larry Bates:      They may tack on a quarter or a half a percent on top of that. But that still leaves you with much lower fees than the 5 million Canadian households who own high-cost mutual funds.

Doug Hoyes:    Could be still paying a couple of points less.

Larry Bates:      So one way to look at it is: Retirement is expensive. Get yours for less.

Doug Hoyes:      Get yours for less. Retirement is expensive, get yours for less, by not paying all these fees in the 30 years leading up to retirement.

Larry Bates:      Not by taking any more risk or buying wild stocks, or whatever – by minimizing our costs.

Doug Hoyes:    So this sounds to me like going to the grocery store and I can buy the name brand or the no-name brand. The no-name brand is cheaper but it’s made by exactly the same manufacturer who makes the name brand, so I’m getting essentially exactly the same stuff, I’m just paying less.

Larry Bates:      That’s right.

Doug Hoyes:    It’s pretty much as simple as that?

Larry Bates:      Yeah.

Doug Hoyes:    Okay, now let’s go back to the title of the book, Beat the Bank[s], so that doesn’t sound complimentary to banks.

Larry Bates:      It’s a bit provocative, I suppose.

Doug Hoyes:    A bit provocative, okay, so there you go. And why is it necessary to beat the banks? Now I understand what banks are, and so in my world I have people coming in here, in this very office, where you’re sitting in that very chair, and they tell me, “Yeah, I’ve got all this credit card debt and I’m paying 20% interest on it”, or, “I’m going to a second tier lender and paying 45% interest on it”. And I’m going, okay, yeah the banks make huge profits, billions of dollars a month if you add them all together. So getting out of debt and getting that out of the way allows you to beat the bank from the point of view of debt. Is there something analogous that you’re saying on the mutual fund side? Is it really the same thing?

Larry Bates:      It’s very analogous; it’s like the mirror image of that.

Doug Hoyes:    It’s the mirror image.

Larry Bates:      Yeah. The mutual funds, most of them, and there are some exceptions, but the great majority of mutual funds sold by the banks and the industry generally contain these deceptively high fees which extract a very large chunk of the average Canadian’s investment portfolio, of their retirement accounts. So they’re kind of like the credit cards of the investment world.

Doug Hoyes:    They’re the credit cards of the investment world. Okay, now that I understand, it’s a high-priced product.

Larry Bates:      Yes.

Doug Hoyes:    It’s as simple as that, then. Okay, now so I understand why you want to beat the banks, that they’re making huge money and it’s coming out of your pockets, so you’d be better off doing it the less expensive way. Kind of like, pay off your credit cards and then you’re not paying the bank huge fees.

Larry Bates:      Kind of like switching from a credit card, 18% or 20% debt, to a lower-cost —

Doug Hoyes:    Yeah, line of credit or something like that.

Larry Bates:      It’s very similar.

Doug Hoyes:    And you’re getting perhaps the same thing.

Larry Bates:      But you need to understand a few of the basics. If you just go into the bank branch, or if you just do what you’re told, which is what most Canadians do, you’re going to be directed into this high-cost stuff.

Doug Hoyes:    Well, so let’s go through some of the basics. And again, this isn’t an investing show, and I’ve got a few more questions about debt. But can you, in a brief period of time, walk us through what you would consider either the fundamentals of investing, or what –? I don’t know, what’s the formula if I really want to build up my wealth? How would you –? Can you simplify that for us?

Larry Bates:      The book’s a couple of hundred pages —

Doug Hoyes:    So everyone needs to read the book to get the full flavour of it.

Larry Bates:      Yeah.

Doug Hoyes:    But can you give us kind of an overview?

Larry Bates:      Sure, I talk in the book about the wealth formula. There are six factors which will determine the success or failure of every investment you make. There are three wealth builders and three wealth killers.

Doug Hoyes:    Three wealth builders, three wealth killers. So let’s start with the builders.

Larry Bates:      Okay, let’s start with the builders. Very simple, the amount you invest, the time period over which you invest, and the rate of return. Now that’s very simple right?

Doug Hoyes:    Yeah.

Larry Bates:      The more you invest, the longer the time frame, the higher the rate of return, the more money you’re going to end up with. So that’s pretty straightforward. But the magic comes with that compounding, you know, over time that gain on your investment accelerates and accelerates with the benefit of compounding. So that’s why Albert Einstein said that compounding is the most powerful force in the universe, it’s deceptively powerful and you want to be able to capture that. And I’ll give you a little example, everybody talks about Warren Buffett as the –

Doug Hoyes:    I’ve heard of him.

Larry Bates:      – most famous, successful investor in the world. And sure he’s a smart guy, but more than anything else he has benefitted from investing over a long period of time. He’s 85, he’s been investing since he was 20. That’s the big secret, time is a huge driver. So those are the three wealth builders: The amount, the time, and the rate of return.

                          But you got three wealth killers. The first one is fees. And this is where most Canadians really fail, because they listen to their advisors who put them into high-fee products which cause so much damage, and also really undermines or destroys that compounding magic that you want to be able to keep. So that’s fees.

                          The second one is taxes. Taxes also destroy wealth. Now most Canadians do a decent job at that using TFSA accounts to invest, or RSP accounts, so most people have that somewhat managed.

                          And then the third wealth killer is inflation. Over time the value of money declines as the cost of goods and services go up. There’s nothing you can do about that, you just have to beat inflation. Now let me give you a little example. Let’s say on that on your wealth builders side you are able to generate an average annual return of 6% a year, that’s pretty good, but what about the wealth killer side? Let’s say that you’re paying 2% a year in fees, so now that 6% is 4%. And let’s say that you’re paying a 50% tax rate, so now that 4% is down to —

Doug Hoyes:    2.

Larry Bates:      Only 2% after tax. And let’s say that inflation is running at 2% a year, well now you’re down to a net zero, you haven’t gained anything in your purchasing power. So that’s an example of how a pretty good return can be diminished by those wealth killers. So that’s the basic formula, so if you can understand those basics and try to manage those six forces as best you can in your own portfolio, in your investment approach, then you’ll do well. So that’s sort of like a fundamental of investing, that’s the wealth formula, and if people understand that a little bit they’ll make smarter choices.

Doug Hoyes:    Makes a huge difference. And again, Beat the Bank, it’s got all of that in that. So we already talked about if I got a whole bunch of credit cards, and you said, yeah, get them paid off, that’s kind of a no-brainer. But what if I have a mortgage? So let’s say I’ve got a house that’s worth – I don’t know – $500,000, and I got a mortgage that’s $100,000 – $200,000. I’m not bumping up against the limit, it’s a reasonable number. At what point do I say, mm, I just got a $4,000 bonus at work, should I use that $4,000 to pay down my mortgage, or should I use that to phone up my friendly robo-advisor and put $4,000 into that? How do I make that decision?

Larry Bates:      Well, I would say first of all both those decisions are good ones. You’re not sort of blowing the money on a trip or whatever —

Doug Hoyes:    So you kind of can’t go wrong?

Larry Bates:      Pretty much you can’t go wrong either way as long as that debt reduction is a permanent debt reduction. If you’re paying off debt and then borrowing again the next month that’s not going to do any good.

Doug Hoyes:    If it’s your key lock on your house and you just borrow again, then you haven’t really accomplished anything.

Larry Bates:      Exactly. But if the choice is between permanently really knocking down that mortgage principal amount and maintaining your monthly payments, which will accelerate the reduction of your mortgage principle amount, the decision is between that and investing for the long-term, it depends but both are great choices. Permanently reducing debt does as much for your net worth as making a long-term investment.

Doug Hoyes:    Yeah, because compounding works both ways.

Larry Bates:      Yeah, exactly.

Doug Hoyes:    If I’m investing my assets build up more, but if I am paying down debt I am not going to have to make those debt payments forever.

Larry Bates:      Yeah, it can make a dramatic difference in the total interest you pay over time. But people face this question, some people do this is sort of classic Canadian move of let’s say they get a $4,000 bonus, they put it in their RSP let’s say in February and then in April they get a tax refund of a couple thousand dollars.

Doug Hoyes:    Using that to pay down on the mortgage.

Larry Bates:      And then they go and use that to pay down their mortgage. I mean that’s a great way to manage it, sort of to have your cake and eat it too. It also depends, are you comfortable with taking stock market risk?

Doug Hoyes:    That’s a very good point.

Larry Bates:      Because, you know, the market doesn’t go up at 6% or 7% a year, it’s all over the place, it bounces around. I would suggest that you stay away from the stock market unless you’re prepared to be in it for the long run, and if you are in it for the long run through all history that’s paid off, but you’ve got to be able to stomach the volatility.

Doug Hoyes:    Yeah, there’s lots of one-year periods where the market has gone down, there aren’t a whole lot of 20-year periods where it has.

Larry Bates:      In fact, if you look at the S&P 500, the biggest U.S. stock index, in other words the U.S. stock market, there has never been a 20-year period where the market’s been down.

Doug Hoyes:    So if I bought it at any point and waited 20 years I was up?

Larry Bates:      A hundred percent of the time.

Doug Hoyes:    Yeah, and I think your point about risk is a key one because when you’re deciding should I pay down my mortgage or invest, well there’s a mathematical way to do that. I guess how much is the interest rate on your mortgage? How much do you think you can earn on a mutual fund, or an ETF, or whatever is it? But there is also, and I think you’re absolutely right, the risk component. If I pay down my mortgage I don’t have a mortgage payment, so if I happen to get laid off, if I want to retire early, well I’m living in my place and I’m not paying a mortgage on it, I don’t have to earn as much, my risk level is dramatically dropped. So I agree that it is not just a mathematical question, I think it’s also a risk question.

                          Now, a final question for you.

Larry Bates:      Sure, yeah.

Doug Hoyes:    Retirement. Have you ever heard of retirement? You know what that is? This is a big thing for everybody.

Larry Bates:      I’m trying to figure that out like everybody else is.

Doug Hoyes:    Yeah, when are you retiring there, Larry? So you’re busier now than when you were working at the bank, so what advice do you give people when they’re thinking towards retirement? What should I be keeping in mind? Obviously if I’m a young person it’s a long-term thing, if I am older then it’s a shorter-term thing, but how do you advise people when it comes to retirement?

Larry Bates:      I think for younger folks it is, you know, if you’re in your 30s for example it’s so far away.

Doug Hoyes:    It’s almost not a real concept.

Larry Bates:      It’s not worth trying to figure out exactly what the plan is, because life gets in the way, things change. For those folks I would recommend attempting, to the extent that you can, and I know saving is really, really hard, but if you can, save some of your monthly income, or annual income, and tuck it away. You’ve got the big advantage of taking advantage of time. The longer the time you have the more —

Doug Hoyes:    Time is your friend.

Larry Bates:      Yeah, time is your friend. So try to take advantage of that. For folks who are in their late 40s and 50s, I think you have to start thinking about what your income is going to be in retirement, what that might look like, and what your expenses might look like, and see what the gaps are there, and think about, okay, well I’ve got to find some way to fill that gap. And investing, probably for most people, is going to be a part of that.

Doug Hoyes:    And so your thought process, as we said at the start, is get out of debt first, particularly the high interest rate debt. The mortgage, well you can debate that. But it’s a no-brainer – credit cards, payday loans, anything like that, that’s got to go first.

Larry Bates:      Absolutely, yeah.

Doug Hoyes:    And then look to ways, and really what you’re saying is, yeah, you’ve got to think, you’re going to have to do better research. Your book is a great place to start, but like you said, there is Google out there, you know, should I invest in a TFSA or an RSP? Well, do some searches and start thinking for yourself and go from there.

                          So how can people find your book? Where is it available?

Larry Bates:      The book is in stores across the country. It’s also available on Amazon, or on Indigo.ca, in both print and in ebook format, Kindle and Kobo. The book is in libraries across the country. You can check out my website – larrybates.ca – there is some great information there including a very handy and, for most people, very shocking little tool that demonstrates the impact of fees they’re paying over time. And you can find me on social media as well.

Doug Hoyes:    Where can I find you on social media? What’s your Twitter handle?

Larry Bates:      I don’t even know what it is, I think it’s @LarryBatesBTB. Yeah.

Doug Hoyes:    So I will put links in the show notes to all of that stuff. So your website, how they can find the book – which of course they can find through your website as well – and your Twitter handle and everything. Is there any final bit of advice you would like to give everyone listening, and particularly someone who has perhaps come through a period of having a lot of debt, they’ve managed to clean it up, or getting very close to cleaning it up, what are the next things they really need to be focusing on?

Larry Bates:      Well, I think the main message of the book is: Take a little bit of time to learn some basics and it will serve you well over the next years and decades. And saving is tough, but it can feel pretty good to be an investor, a long-term investor, and then to see your money grow over time, especially if you understand a little bit about what’s going on. It can mean less stress and ultimately more smiles.

Doug Hoyes:    Excellent. Less stress and more smiles, I think that’s a great way to end it Larry, thanks for being here today.

Larry Bates:      My pleasure, thank you.

Doug Hoyes:    That’s our show for today. And as I said at the start of the show here on Debt Free in 30 our goal is to help you become debt free, so on most of our shows we talk about debt. Today we looked ahead to when you are debt free and have money to invest, and I think Larry gave some great advice on how to get the most bang for your buck on your investments. Small savings in investment fees make a big difference in your overall returns, and in fact you’re not talking about small savings you’re talking about huge savings when you look at it in percentage terms, so I think that’s an excellent way to do it.

                          For more information, including links to Larry’s website and his book, you can go to the show notes at Hoyes.com, that’s H-o-y-e-s dot com, where you can also find a full transcript of today’s show. And when you do go to the bookstore to buy Larry’s book just tell them: “Yeah, I’m here to buy two books, ‘Beat the Bank’ and ‘Straight Talk on Your Money’, do you have both of them, please?” So that would be my unbiased advice there.

Larry Bates:      A great one-two punt.

Doug Hoyes:    Yeah, absolutely, totally unbiased advice there. Excellent, thanks for listening. Until next week, I’m Doug Hoyes, that was Debt Free in 30.

The post Want to Beat the Bank? Understand the Basics appeared first on Hoyes, Michalos & Associates Inc..

Enter Scott Marshall. With 30 years of experience in the driver training industry, he shares his first-hand knowledge of how to make car ownership affordable. He also suggests that there is a correlation between safe driving and saving money.

8 Ways to Make Car Ownership Affordable

Scott shares the following tips for successfully keeping your car buying costs low:

1. Buy used. According to Scott, a used car is a great way to achieve affordability. A used vehicle can be reliable if you’re strategic in your purchase and maintain your car well. 
2. Buy a car that’s only 3 or 4 years old. Your car will still be very close to the most modern vehicle, but at only 60% of the cost. Don’t worry about newer features because the most important ones (anti-lock brakes, electronic stability control, and airbags) are all standard anyway.
3. Buy from a credible dealer. Browse websites like Auto Trader, where you can find a car that is certified pre-owned, meaning it’s backed by the original manufacturer. That also means it’s  been through rigorous inspection.
4. Save on insurance proactively. Your insurance payments depend partly on the type of car you buy. Minimize these monthly costs by asking your insurance company how much your payments will be based on vehicle models.
5. Test-drive more than one car. Don’t give up if you’re unhappy with your first test-drive. If you’ve found a model that fits your budget, test multiple cars. They will each drive differently, even if they’re the same make.
6. Save money on tires by alternating them. Scott suggests buying winter tires in the colder months to replace your all-seasons. Even at a temperature of plus 7 degrees Celsius, all-season tires will harden and wear more quickly. By investing in winter tires, you can extend the life of your all-seasons by 3 or 4 more years, saving you a lot of money in the future.
7. Consider getting a CAA membership. CAA memberships cost less than $80 a year. While this still sounds like an added expense, it saves you hundreds of dollars on a towing service in the event of a roadside emergency. 
8. Determine the kind of car you’ll need 5 years from now. Think carefully before you buy your vehicle. If you think you’ll need a bigger car in the future, don’t buy a smaller one now. You’ll save a lot more money because you’ll avoid rolling over auto loans and risking financial trouble. 

Read More: How Can Car Loans Lead to Insolvency? 

Your Driving Style Can Save You Money

Driving habits play an important role in ensuring that car ownership remains affordable.

Drive safe. Accidents are costly. The only way you can drive safely is by being attentive at all times. It’s for this reason that Scott says not to rely on any automated safety features your car may have. For example, even if your car has a blind spot checker, you should still be checking your blind spot yourself. Because should this feature fail, you’ll most likely end up in an accident. And as you’re probably aware, an accident leads to higher insurance premiums, which add to your monthly expenses.

Read More: Avoiding Debt Problems After a Personal Injury

Other cost saving driving habits:

• Gentle acceleration to save on fuel; and
• Easing off the gas early for a red light to save brake wear, which saves on maintenance and fuel costs

Owning a car doesn’t have to be a huge burden on your finances. As long as you buy what you can realistically afford and drive with caution, it’s possible to have this necessity without breaking the bank. 

For more details on what to look for when buying a used car and safe driving tips, tune in to the show or read the complete transcription below.

Additional Resources

The Safe Driver Blog
Scott Marshall Twitter

FULL TRANSCRIPT – Show 228 Buying and Maintaining an Affordable Car

Doug Hoyes:    Cars are great; they take you places, like your job, so for a lot of people a car is essential. Cars are great but they can also be the cause of significant financial problems. According to market research company JD Power, 72% of new vehicle loans taken out in Canada are now for six years or longer, 44% are for seven years and eight year loans are now more than 10% of all new vehicle loans. The longer the loan the more likely you’ll have problems paying it back and that’s become an increasing problem for my clients.

                          We’re going to update it in 2019 but up until the end of 2017 or Joe Debtor Hoyes Michalos bankruptcy study shows that more than a third of people in Ontario, who go bankrupt or file a consumer proposal, have negative equity in their car. That means they owe more than the car is worth and they can’t afford to make the payments.

                          As car loans become longer that becomes an even greater problem. I can think of hundreds of people I’ve met over the years, often young men, who are paying up to half of their income for their car. They make $2,000 a month in their job and they’re paying $500 for a car loan and $300 a month for insurance and a couple of hundred dollars a month for gas and maintenance, so it’s not hard to see how owning a car can lead to financial trouble.

                          So what can you do to protect yourself? Should you only buy new cars or only buy really old used cars? What options should you get and which ones should you avoid? On today’s show we aren’t going to focus on car loans and debt instead we’re going to take a very practical look at how you can get the most bang for your car buck. So let’s get started and meet my guest today. Who are you and what do you do?

Scott Marshall:  Well, I’m Scott Marshall and I am the director of training for Young Drivers of Canada, 30 years at Young Drivers. I’m also a road safety blogger and for the first three seasons of Canada’s Worst Driver I was their head instructor and on-air judge.

Doug Hoyes:    Excellent, Canada’s Worst Drivers. And I remember the show, I mean you had people and basically critiqued all the bad things they did driving. What were some of the things that stand out when you look back on that these are the obvious mistakes people make or mistakes people shouldn’t be making?

Scott Marshall:  Well it goes from one end of the scale to the other, they were either over confident in lack of ability or under confident and lack in needing the ability of their passenger to help them drive. And over time we were hoping that they would change their behaviour and their thought process because really it’s your brain that makes all the choices, it shouldn’t be your passenger’s brain.

Doug Hoyes:    Passengers can get you into a lot of trouble.

Scott Marshall:  They do and especially passengers who think they know what they’re doing and in reality they don’t.

Doug Hoyes:    Yeah, that’s even worse. Now you said that you’re a blogger, what’s the address of your website, where can people find that?

Scott Marshall:  My blog is thesafedriver.ca.

Doug Hoyes:    thesafedriver.ca and we’ll put links to that in the show notes so people can find it. Now I’ve read a bunch of your blogs and in one of them you put a phrase which I had never heard of, target fixation. What is that, what are you talking about there?

Scott Marshall:  Yeah, if you want to avoid something you avoid looking at it. So, when you’re driving and you want to avoid driving into the snow bank then if you look at the snow bank where you look is where you go. It’s like athlete’s do, the athlete has a target they look at their target and they throw their ball into the target. You look at a snow bank and you go into a snow bank. So you look into the open space where you want the car to go and then steer to get there.

Doug Hoyes:    So that’s the key. Okay, so there you go, we’re given free driving tips here, look where you want to not where you’re heading.

Scott Marshall:  That’s right, not what you’re trying to avoid.

Doug Hoyes:    Yeah, which is naturally what you’d be focused on. Okay, so let’s get into the kind of money aspect of this here. So, let’s assume that I don’t have a lot of money, which is the case for most of my clients, and, you know, maybe I went through a bankruptcy or consumer proposal, I had to give up my expensive leased car but I need a car to get to work. And we’re recording this today in my office in Hamilton, up on the mountain. And this is a town where people drive cars. Yes, there’s a bus, it stops right outside here, but this is an area where cars are very prevalent.

                          So, you know, I need a car to get to work, my shifts starts at 5 in the morning, the buses don’t start running till 6, I’ve got to have a car, it’s got to be something reliable but I can’t go out and, you know, just be buying a brand new car all the time. So if you were advising someone in that situation what should they be looking for? Should they be looking for, you know, yeah, you’ve definitely got to buy a brand new car because it’s got the best warranty, in the long run you save money or should you definitely be buying a 10 year old car because they only cost a thousand bucks and you can’t go wrong? Where do you – what’s your advice in that situation?

Scott Marshall:  Let’s go right in the middle of that. Buying a three or four year old vehicle you have something very close to the most modern vehicle. In some cases there’s still part of a warranty, perhaps a drive train warranty, maybe not your basic warranty but you’re going to have as far as your engine and transmission goes.

                          But you have something that’s more reliable getting into an older vehicle, the parts are older, they’re more worn down, there’s more kilometres on that. And it’s like a pair of running shoes, they’re still comfortable but they’ll leak in the rain and so you’re going to have to get something that’s newer, not necessarily new and something that’s reliable. It’s going to cost you maybe, you know, 60% of what a new vehicle would cost.

Doug Hoyes:    So you’re talking a three or four year old car.

Scott Marshall:  Yeah.

Doug Hoyes:    Because a new vehicle the moment you drive it off the lot you’ve lost, I don’t know, 10%, 20%, whatever it is.

Scott Marshall:  Depreciation, that’s correct.

Doug Hoyes:    So it drops pretty quickly.

Scott Marshall:  It does.

Doug Hoyes:    So you would be targeting three to four years old because the price could be 60% of what the brand new vehicle is, it’s still got a bunch of the bells and whistles. It doesn’t have the hand crank like we used to use.

Scott Marshall:  Well it might still have that but the reality is that every six months or every three months there are new safety features on vehicles. We have roughly 25 sensors on our vehicles now so these sensors help us with our backup camera, lane departure, ESC, was a standard feature a few years ago in Canada along with ABS brakes.

Doug Hoyes:    And what is ESC?

Scott Marshall:  Electronic, stability control. It helps you – it helps slow down the car if you’re about to take a corner too fast without you touching the brakes so it’ll do it automatically. Not that you want to try it to find out what it does but you can check out my blog and it’ll tell you what it does. But the three and four year old vehicle will still have those, you don’t have to get brand new to get that.

Doug Hoyes:    Got you, so you’re getting the benefit. And like you say the drive train warranty, or something, well it may be a five year warranty or X number of kilometres or something like that so you’re getting the best of both worlds.

                          Okay so that makes sense then so that’s a value proposition there. Are there any, I mean you just mentioned a bunch of them, options? Are there any options that are either really good to have on a car that definitely make it safer or that you know what you’re paying a lot of money for something that it’s kind of like buying a house well, if you put in a pool you never get your money out of it they say, right? Is there anything in the car world that’s similar to that?

Scott Marshall:  Because there’s been a lot of features that are standard now, like as I mentioned anti-lock brakes, electronic stability control, all the airbags have been around forever so it seems in many people’s lives, there’s not a lot that you have to worry about needing because they’re already standard feature. But if you have a back up camera, they’re helpful in a tight spot, they’re not necessarily something you have to have but they are helpful, things like that.

Doug Hoyes:    So that would be an example of something well, if you’ve got a choice, particularly paying a few extra bucks to get a vehicle with a backup camera, you’re in a better shape.

Scott Marshall:  Fog lights too, I mean you don’t think about that but if you’re in that type of area where it’s foggy and around here it is then yeah having fog lights on a vehicle is a perk, it allows you to see the road a little better. I’m all about the safety part but if you can save a few bucks and be safe let’s do both.

Doug Hoyes:    Even better. So let’s say I take your advice and I want to buy, I want to target a three or four year old car. Where should I buy it then, should I go to a used car lot, should I go to Kijiji or find it online? Where would you be sending me?

Scott Marshall:  The newer and the upscale lots can have better vehicles, lower mileage, which again means it could very well last you longer. There are some lots that will go to the wholesaler, get the vehicles and there could be something seriously wrong with it. So I would go to a reputable place, you can go to the online magazines such as Auto Trader. Dealers will advertise on Kijiji as well so you could check both those places and there’s a few other websites that you can search out.

                          But once you have an idea about what’s out there and what your budget is, go out and test drive a bunch, find out what works for you. Just test driving one vehicle say a Honda Civic, doesn’t mean that, and that one didn’t drive so well, doesn’t necessarily mean all Honda Civics are like that. Go and test drive a couple of others, maybe it was just that one that didn’t perform as well as you like.

Doug Hoyes:    Well and we all have different body tops so if you’re short maybe you want a car that rides higher up, if you’re really tall maybe that little tiny compact isn’t going to work for you. So, I agree, getting in them how else can you know?

Scott Marshall:  That’s right. And part of your decision making is also what can you afford but also about the fuel, check with the insurance company too, find out okay, if I bought this vehicle what would my insurance be?

Doug Hoyes:    That’s’ an excellent point. Especially if you’re younger the insurance can be costing you many hundreds of dollars a month if you buy this kind of car versus that kind of car and you can save a hundred bucks in insurance well that’s huge, that’s huge.

Scott Marshall:  Yeah, it is, $100 a month can go a long way on a tight budget. And it’s something that what kind of safety rating does the vehicle have? SUVs tend to have a little higher safety rating so you may want to consider that. And a lot of them are now more economical to operate than they were a number of years ago.

Doug Hoyes:    So we’re recording this in January, 2019 the middle of the Canadian winter. Snow tires, what are your thoughts on snow tires? So I’m asking the question from two points of view, money and safety. So I think we all kind of agree that yeah, if you’re on slippery conditions, snowy conditions, whatever snow tires are better than non snow tires, and you can tell me if that’s true or not. What about from a money point of view, are snow tires a good investment or not, from a money point of view?

Scott Marshall:  From a money point of view they very well can be if you are keeping the vehicle for a few years so if you keep the vehicle for three or four years that’s three or four winters you’re going to have them with. And while your winter tires – they’re winter tires versus snow tires because it’s a season, not necessarily the elements, so the cold weather affects the all season tires. They become very hard like a rock when the temperature drops to seven Celsius, not even minus, but down to seven. So having the winter tires for five or six months during the cold weather you’re actually saving your all season tires so they’re going to last you an extra three or four years.

Doug Hoyes:    So if I’m going to have my car for the next four or five years then it’s kind of a no brainer.

Scott Marshall:  It is, it is and if can go to used tire places and get some winter rims for economical costs so then knowing someone and changing your tires yourself it doesn’t cost you anything to switch your tires over.

Doug Hoyes:    Yeah and that’s exactly what I do. I don’t change them myself because I’m an accountant. You know what, I’m sure I could learn and when I was a kid we had, you know, the ramps and the jacks and the things to change your own oil and anything but I find going to the place and paying the guy money makes the most sense. But I do have the steel rims, I keep the snow tires on those so swapping them out is no big deal.

                          So, okay so if I’m keeping my car for an extended a period of time – obviously if you switch cars every year and switch models well then the old snow tires aren’t going to fit on the new one potentially but if you’re sticking with the same model and I’ve had the same model of car for I don’t know 10 years so snow tires can keep going. And from a safety point of view, and again I just realized I said the wrong thing again, that they’re not snow tires, they’re winter tires because it’s a season, there’s no doubt they are safer in the winter than all seasons.

Scott Marshall:  They are. So let me bring it back to the economical side of it. You’ve got some slippery conditions, you’ve got some snow, you’ve got some deep snow and you’re stuck and you’re going to get back and forth and you’re pressing the gas. You’re wasting this fuel to get out of some snow drifts where winter tires you can just drive out. I was parked in the parking lot, dug out my car with a shovel I had in my back of my car, drove out no problem. Winter tires on. The person up the laneway, back and forth, back and forth, back and forth, he used a lot more gas than I did. So now each time it snows do I want to get stuck and use up a lot of fuel or do I just drive out?

Doug Hoyes:    And I guess that’s not easy on the engine either when you’re spinning your tires and all the rest of it.

Scott Marshall:  Yeah, it’s not a good technique to get out anyway.

Doug Hoyes:    It’s probably not great.

Scott Marshall:  No, it’s not.

Doug Hoyes:    Okay, so winter tires probably a good investment. Another investment I’ve always made is I’m a member of the Auto Club, CAA and I’ve been a member of that since I was like 16 years old and I think my dad got me into it. Because his thought was well – because back in those days I was driving 10, 15 year old cars, so we knew they were going to break down, we knew there was going to be a problem, so you need someone to come and get you well, they’ve got a tow truck I don’t. From a financial point of view, is that a good strategy or is that a waste of money?

Scott Marshall:  No, it is a good strategy for the cost, which I think is like 80 bucks. And then if you have a family member, you can be an associate member which is like 45, 50 dollars. So think about what a tow is going to cost you, one tow stranded at night where you car wouldn’t start, one dead battery, one stuck in a snow bank, just one is going to cost you more than your membership. So, it’s a good thing to have. There are some vehicles that are still out there that the automaker allows they have the roadside assistance that comes with the vehicle. Depends again on how old the vehicle is.

Doug Hoyes:    Yeah, so if you’re buying a brand new vehicle that may already be included, not a big deal.

Scott Marshall:  But if it’s a used vehicle, four years old, what’s still left on it if there is anything at all? And having an Auto Club membership or a very handy parent, either one comes in handy.

Doug Hoyes:    Well and that’s exactly what I’ve done and when my son started driving yeah, you can put him on as a supplemental. It doesn’t cost – it’s certainly not double the cost to put a second person on. So it kind of makes sense.

                          Now at the start of the show I said it’s becoming more and more common to have longer and longer loans, six years, seven years, eight year loans. That sounds crazy to me because in my experience your typical car doesn’t last for eight years. Am I wrong, are cars lasting longer, is an eight year loan actually not a bad thing or is it much more likely that you’re going to be turning the car over more frequently than that?

Scott Marshall:  Depending on what you use your vehicle for, if it’s your typical to and from work and the additional pleasure use, you’re probably putting 20 to 25,000 K on a year. Your car’s going to last you awhile, it really will. They’re built better now. So a seven year, eight year loan a lot of it is so that people can afford it.

Doug Hoyes:    The entire reason, yeah.

Scott Marshall:  They’re so expensive now, which comes back to a three, four year old care, it could be 60% of the cost of a brand new one so it’s more affordable. But yeah, cars do last and one of the plusses as a driving instructor if we had a chance to own our vehicle for a year after it was paid then that’s extra because we put a lot of kilometres on our vehicles. But we want something reliable. We don’t want to have to cancel lessons because our car’s in the shop.

Doug Hoyes:    So the cars you’ve got at Young Driver’s of Canada, what kind of mileage, what kind of age is it then when you then get rid of them and get another one?

Scott Marshall:  Well, we probably generally for the most part won’t keep anything past four or five years. We’re putting 50 thousand K a year so more than twice as much than the average driver. And it’s hard kilometres because it’s someone who’s just learning. So the brakes are a little, you know, get a little worn and the tires don’t last as long as years wise, they’ll probably last us two years.

Doug Hoyes:    But you’re just replacing the brakes, replacing the tires and keeping the car.

Scott Marshall:  That’s right.

Doug Hoyes:    So the car gets to 250,000 and okay well then that’s probably when we’re turning it over. But by that point it might have a couple of sets of tires, three sets of brakes, whatever.

Scott Marshall:  Exactly, that’s right, that’s right. But to the average driver who’s commuting to work and taking their family out and vacationing, you can see your car lasting a good 10 years but part of that is preventative maintenance.

Doug Hoyes:    Right. Are you spending the money then to do all those things that we just talked about?

Scott Marshall:  That’s right.

Doug Hoyes:    And the problem I see people getting into is I don’t want to keep the car for 10 years or there’s all these new bells and whistles or, you know, I just had another kid so now I need a van, I can’t be driving a sports car anymore.

                          So the reason that I said at the start that a third of our clients end up having a short fall on their vehicle when they come in to see us is because they’ve got a five year loan, they keep the car for three years and then they want to switch to a different vehicle. There’s a short fall and the car place says no problem we’ll take that shortfall and roll it into your new vehicle. So now I bought a $30,000 vehicle but I’ve got a $35,000 on it because I had to roll in from what was there before and I keep that vehicle for three years and now I’ve got to roll it into something else.

                          Well now I’ve got a six or seven thousand dollar shortfall that I’m rolling. At some point you get to the point where you’ve got a $20,000 loan on a $6,000 vehicle. And when people come in to see me I say well, here’s your choice, you can keep the vehicle and go bankrupt but you’re going to have to keep paying the $20,000 loan for a $6,000 vehicle. It doesn’t make a whole lot of sense.

                          Maybe you’d be better off to say okay, here you go car lender, here’s the keys, take the vehicle. And then the short – you don’t have the vehicle anymore but that shortfall can then get included in your bankruptcy or proposal. That’s the big problem with the long loans if you’re not going to keep the vehicle for that length of time. So I guess that’s kind of the key, how long are you really going to keep it for?

Scott Marshall:  Yeah, exactly. And I know that my older son wanted to buy a vehicle and he decided he wanted to pay cash.

Doug Hoyes:    I like him already.

Scott Marshall:  Yes. He was working extra hours, worked a long time to get the money and I went out and helped him. And the thing is that where he was working at the time he could not afford a monthly payment. He had to have zero money per month out, other than the insurance and the maintenance. And so now he wants to get a truck, which –

Doug Hoyes:    Costs more.

Scott Marshall:  Costs more, more on fuel, more maintenance, possibly more on insurance, that has not been determined and then you have your monthly payment. So part of it is it’s wants versus needs. Right now he has a reliable vehicle, it gets him to work, gets him home, gets him to come and visit and so forth.

                          And that I think is important, that you have to kind of decide well, I’d like to have that, there’s lots of things I’d like but it’s what do I need. And he got himself a vehicle that was reliable, a little older than the four year but it fit within his budget and it’s all good. And an added thing that people can also do if it’s doesn’t have as much of the warranty is you can buy an extended warranty.

Doug Hoyes:    And is that a good deal or you end up paying a lot more than you’re actually getting?

Scott Marshall:  It’s insurance. You know, I have home insurance in case there’s a fire. I haven’t had a fire but it’s nice to know that I have it.

Doug Hoyes:    Yeah because a fire is catastrophic, you end up having to spend half a million dollars while spending the money each month is a much better deal.

Scott Marshall:  Exactly or whether or not you have a break in and these types of things and your car insurance type of thing. It’s insurance, it’s insurance for the maintenance of your vehicle. And you just have to put that into your budget. So if it’s going to cost you, you know, $80 for this extended warranty then it’s $80 a month that you put into your budget.

Doug Hoyes:    Yeah and I guess you’ve got to do the math and figure out okay so over the next two or three years what is likely to go wrong with my car and if it’s brakes, tires you can estimate what those costs are pretty accurately and it’s probably not, an extended warranty doesn’t cover that anyways. But if the engine goes okay, that costs more money and is it worth it then to have – so I guess you’ve got to fully understand what the warranty actually covers and what it doesn’t cover and then decide for yourself. If you’re driving a $2,000 car I guess when it breaks I throw it out and I get another one kind of a thing.

Scott Marshall:  Yeah, exactly. So, it’s a lot of long term planning, don’t think of today, think of next week.

Doug Hoyes:    Now you mentioned long term planning, so you’ve been in your world for 30 years, it makes you about as old as I am I guess, so we’re both 25 years old. So do you notice, this has nothing to do with money I’m just curious here, do you notice a difference between drivers today and drivers from 20, 30 years ago and maybe even specifically the clients you’ve got at Young Driver’s of Canada, the people you’re training, are they different or is it really just the same, a driver’s a driver?

Scott Marshall:  Generally speaking there’s a bit of a difference. A lot of safety features on a lot our vehicles, a lot of advancements. Drivers are relying on those advancements to help them drive, which is a mistake. For example you have a blind spot indicator on your car, it flashes if there’s someone in your blind spot so you don’t bother checking. And if it doesn’t flash you just move over. There’s snow on the sensor, there’s ice, there’s mud, there’s grime.

Doug Hoyes:    There’s a car there.

Scott Marshall:  Yeah and crashes occur. The drivers are still out there. In Ontario there’s roughly 100,000 new drivers every year. And so our roads are getting clogged more and more now than when I started 30 years ago at Young Drivers. So we have to share, we have to – there’s still the aggressive drives, they were always there. The old cars from the 80s when I started at Young Drivers had the steel bumpers that you hit the steel bumper and nothing happens.

Doug Hoyes:    Nothing happened.

Scott Marshall:  Yeah, nothing happens. That’s not the case now, everything is so cosmetic. You look at a vehicle after a collision you think okay, maybe $1,500, $2,000 damage, no it’s $9,000 because there’s so much underneath the vehicle that, you know, your deductible, which people have to remember that you have to live with that deductible.

Doug Hoyes:    Yeah, you don’t just get a hammer and bang out the dent from the fender, you need a whole new front end.

Scott Marshall:  That’s right. And there’s so much electronics behind the shell of the vehicle. You’re driving a computer now and people forget that.

Doug Hoyes:    Well and that’s interesting what you say about the safety features, it makes me think of hockey. You know, back when, you know, when you and I were born, nobody wore a helmet when they played hockey and yet you never heard about hockey players suffering from concussions. I mean obviously they did but when I was running you into the boards I was a little more careful because I knew I would kill you. So okay, Gordie Howe had pretty good elbows, it’s not like he was the cleanest player in the world but he wasn’t running at people’s heads well now they’re wearing all this body armour, I don’t have to be as safe.

                          And I guess it’s the same with the cars, I got all these safety features and let’s face it cars are going to be driving themselves if they aren’t already, right? So why do I even have to pay attention?

Scott Marshall:  Well, yeah and I mean yeah, now part of the electronics are the automatic emergency braking. Our vehicles are semi autonomous now that allow us to do things. There’s even the parking. I did a couple of videos, one with The Toronto Maple Leafs and one with The Raptors where they have park assist and we didn’t tell the other participant. So we’re doing a [Leo Comber], I was doing a parallel park without touching the steering wheel. And Matt Martin’s in the backseat not knowing that this vehicle could do that.

                          So the car can park on itself so why can’t it do other things by itself? And it will eventually but we just have to remember that we’re the one in control, if something goes wrong you have to be ready to touch that brake. You have to be ready to steer, you still have to look where you want the car to go, you’re still the captain of the ship.

Doug Hoyes:    And that’s pretty crucial. So to end it then it sounds like there’s a pretty big correlation between driving safely and saving money.

Scott Marshall:  Yeah, there is. If you drive safely, gentle acceleration you’re saving fuel, easing off the gas early for a red light, you’re saving fuel, you’re saving brake ware. That saves you money on your maintenance, that saves you money on your fuel. And if you’re looking out for the other guy, you’re not colliding, you’re saving your deductible, you’re saving your vehicle, you’re saving your pocketbook.

Doug Hoyes:    Excellent. Well, so being a safe driver can save you a ton of money potentially, which I never really kind of put it in those terms before but that kind of makes obvious sense. So final question, what is your overall advice then, and maybe you’ve already hit it all, but if you’re talking to, you know, your son when he first started driving or any of the other new 100,000 drivers or more likely someone like me who’s been driving for I think it was I got my licence 38 years ago, two days ago. Because it was – if my math was correct there, I’d have to do the math, I might be a year or two off. But we’re recording this on January and I know for a fact I got my licence January 2nd.

Scott Marshall:  I got mine January 7th.

Doug Hoyes:    Well, so there you go so we’re coming up on your anniversary too then. And I know that because I was, you know, 16 and a half and my dad said okay, you’re the oldest kid, I’ve got to get you driving so you can schlep all your siblings around. And I didn’t have an appointment or anything but it was a snowstorm that day so everybody else had cancelled their appointment so we were able to just walk right in and they couldn’t fail me because nobody could see the lines. There was no snow everywhere so it worked out fantastically.

                          So, what advice then would you be giving someone who is either a new driver or someone like me who’s been driving for so long that I assume I know everything I’m doing and probably have a whole lot of bad habits that are not safe? What are some of the obvious things that maybe I should be thinking about to keep myself out of trouble?

Scott Marshall:  Despite what you do for a living, driving is your job. If you have an appointment, you have a meeting, you have something on your mind relating to work, relating to home, it has to go on the passenger seat and you focus on your driving. We have distracted driving laws that just took place. And distracted driving laws in Canada and Ontario specifically are to do with electronics but it’s not just electronics. It’s your mind, if your mind is elsewhere, your mind is not on driving.

Doug Hoyes:    That’s the biggest distraction of all.

Scott Marshall:  We are our own worst enemy because we have so much. We live in a busy society, our lives are busy, my life is busy. Even though my kids are getting older it’s still a busy life, but when I get behind the wheel that’s my job not because I’m an instructor but because what if the person that sits next to me is daydreaming and they start drifting out of their lane, I need to see that. I need to honk the horn to warn them or slow down and make sure they don’t hit me.

                          I need to know that the driver behind is too close, maybe change lanes to get rid of them, maybe they’re anxious, maybe they’re in a hurry. Driving is my job and I need to remember that. And that’ll save me, my passengers, my bank account, my car, you name it.

Doug Hoyes:    Excellent. Well, I think that’s fantastic advice and a great way to end it. Driving is your job and it’s not just you you’ve got to worry about, in fact it’s everybody else you’ve got to worry about as well.

Scott Marshall:  Absolutely.

Doug Hoyes:    Scott, thanks very much for being here today.

Scott Marshall:  Always a pleasure.

Doug Hoyes:    Thank you. That is Scott Marshall and I’m going to put links in the show notes to everything we’ve talked about. We’ll have full show notes including a full transcript and links to Scott’s website over at hoyes.com. And you can watch the video of all of our shows here on the Debt Free in 30 channel on YouTube and you can get the audio podcast on all podcasting apps so please subscribe so you don’t miss an episode.

                          Thanks for listening, until next week I’m Doug Hoyes. That was Debt Free in 30.

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