Tommy: Are you having trouble getting out of debt? Maybe you have credit cards up to their limit? Or you have debt collectors calling every day? Whatever the case you need some advice. My next guest has that for you. Lama Farran back, personal finance expert founder of MaxWorth. She joins us now. We know Lama, that many Canadians are handling debt badly. For instance some of them might be buying a lot more house then they can afford, but they have a lot of rationals for it. And i want to go through some of these rationales with you. Well, of course I should buy this house, my bank approves me so I must be able to afford it.
Lama:Exactly, you go to the bank, you saw this beautiful house that you love. You go walk in and the bank tell you that yes you’re approved. And then you go all happy and go put an offer on the house. The major issue is that the criteria that the bank uses to approve you is very different than you budget. They are completely two different things. I used to work at the bank myself and I used to approve morthad. The way I approved morthages was I looked at your income that’s coming in, and by the way I look at your gross income not your net, and when is the last time you saw your gross income in your bankout? The only question that I need to answer in a simplified way, does it cover the mortgage that I’m going to give you plus all the other debts that you have. That’s it. I don’t care if your kids are in private school., and it costs you twenty thousand dollars a year, I’m not looking at how many vacations you take, or if you go shopping every weekend. All i’m looking at if the money you have will cover the mortgage plus your other debts. If the answer is yes, them you’re approved. If your answer is no, I will tweak the mortgage a little bit. Maybe I”ll give you a mortgage for 25 years instead of 20 years, or 35 years instead of 30 years, so your monthly amounts are smaller so then you’re approved.
Tommy: the other excuse that is given out is, well of course I have to buy now, the interest rate is so low.
Lama: I know, but isn’t it funny that we have the lowest interest rates in history almost, and then we have the highest debt levels in history right. People are struggling much more than when the interest rates were 20%.
Tommy: Because they are buying a lot more.
Lama: Exactly, because it’s the fear of missing ot. If I don’t buy right now, I’m going to miss out. It’s like everyone is jumping on the band wagon, well I have to jump on it or I am going to look like a loser.
Tommy: This texter is saying, I want to sell my house to pay off debts. If I sell my house I’ll have a profit $50 000. We are 58 and 59 years old, is this the best way to go?
Lama: At 58 and 59 it’s probably not the best time to sell your house. But from what I can hear that they have a lot of other debt to deal with, so maybe it is. But are they going to have time to buy another house before they retire? Probably not.
Tommy: They might rent, but I mean they must have a huge amount of debt. If there is only $50 000 left.
Lama: yes, and this is one issue that I often often see. People using their house as an ATM machine. You accumulate bad debt and then you have equity, you know you go and you pull out the equity to pay off all your debt. Literally your house in an ATM these days.
Tommy: And because Canadians are so bad at handling their debt, would these situations like this texter, when they sell their house and they pay off the debt with their mortgage there will be nothing left?
Lama: I’m working with a couple right now, there exactly in that same situation. They are about to retire and everything is maxed out. Well there is some equity on the house and this is what we use. But then that’s really not a good planning for your retirement. But this is the price you pay when you haven’t paid attention all these years as well.
Tommy: Why are Canadians so bad at handling debt?
Lama: Because it’s so available to us right. It’s like, the bank puts the credit card in your wallet and you think it’s you money. But it has your name on it, but it’s not your money. We think it’s our money, we think that the line of credit that they are giving us is our money, but it’s not our money and we use it as if it’s ours.
Tommy: Aso, are we being tempted in many ways. In other words, we are told it’s nothing, nothing now, nothing next month, nothing for three months and then you have to start paying. Or i t’’s $20 or $10 a month, it sounds like it’s practically free. You get it right away, it’s in our house right away, and all you have to do is pay $10 next month. . It sounds very cheap.
Lama: Yes, it sound very cheap because they break up a big number into a tiny manageable number that our brain can handle. You know if you go to buy a swimming pool, like and in ground pool. It’s what, 15 – 20 thousand dollars a good one. THey aren’t going to write $20 000 in your face, they are going to write $50 every 2 weeks, not even a month anymore. And when you look at that, you think $50 that’s nothing. That is like a restaurant. But then when you look at how much interest you’re going to pay over the lifetime of that pool, you’re going to be shocked. But that’s not a number that people look at, they focus on $50 every two weeks, yes I can afford that. The news is, no you can’t.
Tommy: This texter is saying my house, my car, big renovations are paid. No more big debts. My car was totalled this Christmas, and I want to buy a new car but my credit was refused , why?
Lama: Well, I don’t have the whole story. But the thing is with the car loans these days, because a lot of people go for bigger cars, better cars, that cost more. The car dealerships are going more and more for 7 years or 8 years. So you get into a situation like this where your car is totalled, and you still have like a good few years to pay it off. And your car is worth nothing and you’re still paying for it. So this also goes back to the small amount, it doesn’t cost that much per month. Because they are amortizing it over such a long period of time.
Tommy: This texter says that the cost of food, gas and taxes. Everything has shot up so much. And this is contributed to the personal debt.
Lama: Yes, that’s partly it. I’m sure that the salaries are not going up as fast as the food proces, well the gas you can’t really say that anymore cause it went down. But this is where people have to re adjust their habits, and it’s not just that. We are offered so much more than before, right. You buy an IPad, well guess what in 6 months it’s going to be outdated and you’re going to feel like buying a new one. So we’re always bombarded with, go get the next thing. So it’s not just the prices that are going up we are being more tempted at every corner.
Tommy: Your questions for Lama Farran, text your questions or comments, 514800. This texter is saying that my friend in Calgary used the equity from his house, but two years later the value of his house has dropped. And now it’s less than the debt that he owes. Can you explain that?
Lama: Well I mean this is what happens when all of your eggs are in one basket. I see it often with people saying putting all their investments in their house. Really you have to see this like any other thing, like stocks go up and down. So you can’t really count only on your house value going up. So there has to be some diversification. But yes, Calgary is not doing as well as before with the gas prices going down. So it is, real estate is going to be affected over there for sure.
Tommy: More questions, for Lama Farran. This texter, is fifty five years old, is using eighty thousand dollars in his line of credit, he still has about forty thousand dollars on his mortgage. Being a risk taker I recently started playing the stock market with my line of credit. Up to now I have made fifteen thousand dollars hoping to pay off my line of credit. What do you think about that?
Lama: Well yes it is a risk. This year the stock market is doing well, what if a year like 2008 shows up? It’s not going to be the same scenario. Yes we’re looking at the upside, but there is a downside, and you never know what’s going to happen with the stock market. In this case it worked out well, and I’m happy for him, but you never know how it’s going to workout.
Tommy: This texter wants to know what’s more important? Paying down debt or buying RSP’s? Were fifty five and forty eight.
Lama: It depends on how much catching up for RRSPs they have to do, what’s the rates on their debt. If it like 2% or 20%? So it really depends on how much catching up they have to do. Or they can do a bit of both, they can contribute to RSP’s, get a tax refund, take their tax refund and put it on their debt.
Tommy: Your questions for Lama Farran, a personal finance expert. Her website maxworth.ca. Text your comments to 514-800. This texter is saying that personal finance should be a mandatory course the first year of CEGEP. I think it should be a mandatory course in elementary school.
Lama: Yeah, exactly. No it’s something that you should start teaching your kids, I’ve said it before, as soon as they can count.
Tommy: How’s your son doing? I know he has a big savings account.
Lama: His savings account is growing. He had a birthday party recently so that contributed to his birthday account. It’s fine, like I told you that we told the guests not to bring any gifts but to give money to charity. But there were a few guests who were really insisting on bringing a gift, and they brought a gift, and he didn’t end up playing with them. So it just goes to show you that he really didn’t want any gifts.
Tommy: And this texter says, I’m 53 and I have everything paid off. I own a home, I own a car. $100 000 in my business account, but no pension. What do I do to get a pension so that I am not working forever? By the way I have three kids under the age of six, to put through university.
Lama: Well first of all for the kids he has to start the RESP’s, that’s for sure. And I really suggest that without a pension, and he didn’t mention anything about RSP’s. It’s really time to sit down with a financial planner of his bank to see his retirement plan. What kind of lifestyle he will have when he retires, to really see how much he needs to accumulate in those RSP’s given that there is no pension.
Tommy: Okay some people have some interesting problems to deal with. Lama, this texter is saying I am 21 years old, I have a full time job and have 25 thousand dollars. Would it be better for me to RRSP’s or open up a tax free savings account?
Lama: Well, RRSP’s if it’s just his first job he’s not going to have much contribution growing there. So TFSA as well, he could contribute because I think it starts at 18 or something, so he could put some thousands. The thing with the TFSA because he is so young, don’t go put it in a savings account. It could be a TFSA but invested in mutual funds or stocks. So don’t go the very safe way given he’s only 21. But RRSP he’s not going to have much contribution.
Tommy: This other texter is saying, we’re both sixty, she’s recently come into some money. I’m thinking of selling my home to pay off debt. We are thinking of moving to a more affordable area and buying a house in cash. We also want to try and keep working. Is this a good idea?
Lama: Sure, it could be. The thing with the moving, people say that we’re going to move to a smaller area, but you have to think of all the costs that its going to cost you when you first move to the house. The new welcome tax, the moving costs, the renovation all of that. Is it really worth it to move to a cheaper area once you take into account all of these additional costs that come at the beginning.
Tommy: I think you have to sit down for this, oh wait you’re already sitting. It says Hi, if I want to buy something I save if I want to buy it. No debt is the only way to go don’t throw money away. There is no point in paying interest.
Lama: I love it. The other thing that people fall for is that they think debt is normal. So if you don’t have debt when you pay something cash, you’re weird. This is the mindset that people have, and this is what keeps people in debt.
Tommy: This texter is saying, we are selling our house and moving out of the province. We have a mortgage on our present home, and would like to purchase another when we move. My husband is retired and I am about five years away from retiring. Would we have trouble getting a mortgage?
Lama: Depends. When somebody get approved for mortgages, it’s the income coming in but it’s also all the other stuff. There’s also other stuff that the bank looks at, their credit history, how much savings they have, I mean in that case they will look at their retirement income that they are going to be having coming in. So it really depends on what their income is going to be after retirement.
Tommy: This intriguing question, it says do you have a crystal ball to see if the interest rates will increase soon? We will get Lama’s answer to that, I’ll tell you what I think will happen when I look into my crystal ball. That’s coming up next. Text your questions or comments to 514-800. Intriguing questions for our guests Lama Farran, the texter wanted to know about the crystal ball to see the interest rates if they will increase soon. What’s your prediction and then I will give mine.
Lama: I don’t think it’s right away but I think they will. And regardless of the interest rate, I don’t think people should budget on whatever the government decided for you. Even with the last decrease, the banks didn’t pass on the saving to all the consumer, so you shouldn’t be looking or worrying too much about it at this point.
Tommy: Right, this doesn’t mean you should get deeply in debt. My prediction is that it’s not going to increase, they’re going to decrease. It’s not going to increase this year, next year, or the year after. That’s my personal prediction. Another text coming in, what do you think of my using my fifty thousand as a down payment to a small condo, and renting it out to pay the mortgage.
Lama: That’s a good option, but you have to have some leeway in case you don’t find the right renter from day one, people go on counting yeah my, the rent is going to pay off my mortgage, but have some cushion aside in case you can’t find someone right away.
Tommy: Karen from Laval says, I too believe in paying for anything cash whether it’s a cell phone or car. I never finance new cars, instead I purchase a used car for $10 000 in cash.
Lama: That’s good, but maybe in that case you also have a plan to have a little money aside for car maintenance because you know it’s not a new car, and if i t’s $10 000 it might have some issues after. It’s a good strategy.
Tommy: Debt is a bigger problem for younger people or older people?
Lama: I think younger people because we were born with it. This is the mentality, this is what is surrounding us. I think for the older generation they saw something difference that did not include debt. So they can compare these to days to back in the days. So for younger people there is no back in the day, these are the days.
Tommy: Do you recommend someone declaring bankruptcy to get out from underneath overwhelming debt?
Lama: It could be, i call bankruptcy financial suicide. For some people it could be the only option, but I see it often you have to work on the issues that for you there in the first place. I saw somebody who had to declare a second bankruptcy, because they didn’t learn from the second bankruptcy. So it’s all good and well to declare a bankruptcy and start fresh, but what are you going to do differently?