Category Archives: On Debt

Tips on obtaining, managing and paying off credit. Get out of debt and manage your money so it never again becomes a beast of burden.

How to financially support your child’s cost of living while attending University

Saving for your kids education

With tuition fees alone for a three-year undergraduate course expected to reach £24,000 or more in the UK ($30,000 – $75,000 or more in Canada and the US) the cost of a university education for many may prove suffocating without some kind of financial aid provided by us as parents.

Tuition fees are only the tip of the iceberg for many undergraduate students. There’s also the not so small matter of accommodation and living costs to pay for. Student loans and grants are obtainable for students who qualify, but those who don’t are almost certainly going to require some form of financial supplement from the ‘Bank of Mom and Dad’!

Most parents are keen to help pay some of these costs but unless you have stored up plenty of savings over a number of years it can prove difficult to pay off large chunks of a tuition fee loan. It will leave students with crushing debts that may take many years to pay off.

A key component to avoiding debt is budgeting. Students and parents should make a detailed budget at the beginning of each school year. Figure out what money you have and when it’s available, rather than in February when you realize you’re out of money and then you have to scramble to go out and get a job and work 20 hours a week just to make ends meet. Financial worries can pile up and become extreme sources of stress at the very time you’re staring down at exams and midterm papers become due. Working between six and 10 hours a week really doesn’t have a negative impact on students scholastically, but when you are putting in too many hours, your studies and your success at school will suffer. Working just 6 – 10 hours per week tends to force you to become more organized and that will help a student across the board.

Credit cards are one of the easiest methods of accumulating unnecessary debt, and we caution students to consider the ease of accessing credit wisely, especially new students who are unfamiliar with the credit system.

If you are looking for creative ways to support your kids without the fear of accumulating unwanted or unneccessary debt, one of the best ways to supplement your child’s financial position at university is to give them a helping hand with their weekly spend on groceries, incidentals, utilities and occasional socializing. Giving them cash can lead to poor financial management, accumulation of unpaid bills and the inevitable ask for more. Giving credit cards can expose you and your kid to wanted financial liability. There is something in between.

One of the best ways to help your child become more financially responsible and manage their money more effectively while attending university is to provide them with a pre-paid credit card. The premise of a pre-paid card is that you simply load the funds you want to spend and once it’s gone, it’s gone! As one of the fastest growing consumer trends in the UK, prepaid cards are a fantastic money management tool with many other added features and benefits. Prepaid cards such as the Pockit MasterCard® a do not have an overdraft or credit facility attached, effectively reducing the risk of accruing unwanted debt. As a parent this could allow you to come to an arrangement with your son or daughter to provide them with a predefined amount of funds each week or month, giving them the responsibility to manage their money without the threat of going into debt or unlimited liability.

Better still, cards such as the Pockit MasterCard® are accepted anywhere you can use a MasterCard – that’s over 30 million locations worldwide – giving your child the convenience of a debit or credit card without the risk of being buried in reckless debt. With power and freedom comes great responsibility, but it also comes with a host of additional exclusive offers on utilities, car insurance, impromptu days out and more. Offers vary by provider and geographic location.

University is meant to be some of the best times in your kid’s life. Save as much as you can now to prepare for their future and when the time comes, consider a prepaid mastercard to cover some of the smaller stuff. Allow them to focus on school instead of worrying about bills with the piece of mind and financial security offered by a well thought out education savings plan.

Surviving college or university without incurring debt may seem impossible to most of us, but it can be done. Murray Baker graduated from the University of Western Ontario without a cent of debt. He wrote the book on it. Murray is the author of The Debt-Free Graduate: How to Survive College or University Without Going Broke, a comprehensive and amusing guide to minimizing post secondary debt.

Murray says that the best strategies for surviving postsecondary education without an avalanche of debt are preparation and knowing your resources. He has brought many of his useful tips and strategies to the Web via The Debt-Free Guide and an array of Financial Planning Tools which he developed in partnership with Human Resources and Development Canada. All designed to assist students and parents with planning their post secondary education.



Bet the Farm – Or Lock It In?

I was recently asked by a client whether they should re-finance their mortgage, and if so, how should they do it.

Since there is no way to predict the future, that is a difficult question to answer.  However, the most reasonable way to approach that question is to look at it from the perspective of risk.  A simple search on the internet for mortgage rates reveals that, if an individual were to choose a floating rate right now, they would only have to pay approximately 2% interest.  That means only $2,000 interest annually per $100,000 borrowed.  Not bad.  However, the real problem comes if/when interest rates go up.

The general answer (likely denial) is that the individual will switch to fixed when rates start to rise.  This is a difficult game to play, and it involves predicting the future.  What makes it even more difficult, is that it involves not only predicting the future of interest rates, but being able to do so better than the banks.  The problem with the timing of “the switch” is that the banks set interest rates partially at their discretion.  So, when interest rates are set to rise, they are most likely to raise the long term rates first (making a long term mortgage seem less appealing), and then raise the short term rates later.  This pattern means that consumers will stay in their floating rate too long, and switch too late, once the lenders have had the chance to adjust the longer term rates in their favour.

Worse, if the homeowner is making their buying decision (and affordability) based on low interest rates, it will be unlikely that a higher interest rate later will be work.  This would be like going to a tailor and asking them to give you a pair of dress pants that do not fit because you plan to lose weight before you wear them.  That is not likely, as time tends to deliver weight gain, not weight loss (sadly).  In this market, time is most certain to deliver higher interest rates, not lower (sadly).  Locking in now might appear unappealing, might mean a smaller house and/or higher payments, but might just be the most prudent decision in the long run.

So, what is reasonable?  Right now (Weds Aug 4), a google search tells us that the 10 year rate is approximately 5.0% to 6.5%.  That is an unbelievably good rate.  If you are new to mortgages, find someone who lived through 12-15% long term rates in the early 1980’s to figure out how good that is.  My advice is to make as much of the mortgage fixed rate as possible, and for as long as possible.  Here are some tips:

  • If you think you can aggressively pay down the mortgage, then figure out how long it will take you to pay of the mortgage and match the term to that timeline.
  • If you feel your income will increase in the future and you will be able to pay down more aggressively than a fixed rate term will allow, then take a potion of the mortgage fixed, and take a portion of the mortgage floating.
  • If you are convinced that rates are going to remain low for a while, then take a look at some recent history:
    • The Bank of Canada site gives loads of information about interest rates:
    • if you could negotiate a 5.5% 10-year rate, this is lower than the average 1-year rate for the last decade – the decade with some of the lowest interest rates in history
    • As recently as 2007, the prime lending rate was as high as 6.5% dropping to 2.5% in as little as 14 months.  The reverse could also happen (and has!).

Could you afford to pay three times as much interest on your mortgage within the next 2 years?

One final point – the main issue here is not that the “average” floating rate over the next 10 years will be higher than 5the fixed rate is now.  What is conceivable is that, in that time, short term rates could rise for a period that makes it unaffordable to finance your home.  You don’t have the advantage of the law of averages: as soon as your home becomes unaffordable, you may be forced to make some tough decisions (either sell, or refinance and begin a vicious circle, now with expensive long-term debt).

So, paying a higher fixed rate right now is difficult to swallow, because rates have just been so intoxicatingly low, and it appears that taking a 5.5% mortgage will cost you something, at least in the short term.  However, it is reasonable that you will not be able to make “the switch” on time, and you might get stuck scrambling to get into a fixed rate mortgage at much higher than 5%.  Remember that mortgage debt tends to take 10-20 years to pay off, if not more.  A long-term approach (with some historical context) makes some sense at this point.

Debt and the RRSP contribution – Worth it?

RRSP loans are generally recommended as a way to “jump-start” your savings, or advertised as a way to create wealth where it did not exist previously (check out this sample Google search I did – most of these entries encourage debt).  There are a number of strong opinions out there that can debunk the myth that borrowing to invest is  good for you.

Borrowing to invest is a tricky straegy at the best of times.  Using debt for investment will increase both the gains and the losses that you receive in the market.  However, using debt can mean that you lose more than you actually have – you have lost someone else’s money.  

Leverage can do more harm than good, and must be done carefully.  If you are going to make the executive decision to use debt to invest in the RRSP, then you should be able to answer yes to one or more of the following questions:

  1. Am I at the highest marginal tax rate? If you are, then you will get the maximum benefit (i.e. tax refund) from your RRSP deduction.  If you deduct at lower tax rates, you will get less in the form of a refund at tax time.
  2. Am I going to be able to pay this off before the next RRSP season?  If you are (or you expect some compensation, a bonus or some inflow of cash that you do not currently have) then go ahead.  If not, you will likely just be in the same boat next year, forced to borrow again, and get into a “vicious” circle of debt again and again.
  3. Am I going to get a cash refund by making the contribution?   If you are, then you can have some confidence that you will soon be able to reduce your debt.  If you are not going to generate a cash refund and instead only reduce your taxes owing, then you will not be able to reduce the balance of your “quick loan” at tax time, and you will be encumbered by a great deal of debt.
  4. Is your other debt generally under control?  If so, then you might consider this as a one-time event.  However, if the reason that you have not made an RRSP contribution in the past is because your cash flow is committed to servicing other debt burdens, then this is definitely a bad idea.  Spend time getting your debt under control, and then revisit your RRSP savings later on.

So, in general, an RRSP loan is not a good idea, unless you are simply using it as a bridge until you get other funds coming in.  Also note that the interest payments on RRSP loans are not tax deductible, so there is no added deduction benefit to the investor.

I would venture to guess that, over the long term, taking a year off your RRSP contribution would serve you far better in the long run.  Perhaps, instead of borrowing to make an RRSP contribution, you start a monthly deposit plan and get ahead of the debt curve.