Make sure you don’t spend the money you just saved

July 31, 2012 § Leave a comment


If you have ever cut back on indulging an expensive habit, whether it’s twice-daily runs for a latte or a new pair of designer shoes every weekend, you will have noticed that the money saved adds up in a hurry. Unless you don’t actually save the money, that is.

Often, I have heard of people saving money on one habit, only to use the savings for something else as frivolous. Instead of spending $100 a month on clothing, they might reduce that spending to $50 a month. But all of a sudden, $50 a month is now being spent on upgrading their cable package.

Over all, there is no savings. Just a rearrangement of how they spend their money.

Consider someone who starts a new fitness regimen. Maybe they are lifting weights or running for 30 minutes three times a week. But if they feel famished after their workout and they head off to grab some fast food, also three times a week, they might not notice any change in their physical appearance. Had they not been working out, perhaps those treats would have added a chin. On the flip side, adding the workout while skipping the additional junk food might have resulted in a positive change to their physique.

It’s the same idea with money.

Maybe you have negotiated the interest rate on your next mortgage to be 0.5 percentage points below your offered renewal rate. But unless you have a concrete plan for those savings, they can often find a way of being spent without your even noticing it.

In order for your sacrifices and hard-fought deals to mean something to your bottom line, you need to put the savings to productive use. Paying down debt, investing and purchasing insurance you have been procrastinating about are all good examples.

At some point, everyone has seen those opportunity-cost calculations that show you how reducing your expenses on activity X could turn into $100,000 in 25 years if you instead put the money in an investment portfolio. Generally speaking, the rate-of-return assumptions are on the high side to motivate you. That’s all fine and dandy, but again, it assumes you save the savings.

If you are making a sacrifice to truly improve your finances, an easy trick to implement is to set up automatic transfers from your chequing account to your savings account that mimics your old spending pattern.

For example, if you are giving up a pack of cigarettes a day, you can set up a daily $10 transfer. If you are skipping ordering wine when eating out on Friday nights, you could set up a weekly $25 transfer. (Make sure that your banking package covers all the extra transactions before setting these up.)

If you are cutting back infrequently, ING Direct Canada has a new feature on its mobile banking app that allows you to sporadically transfer money from your chequing account to various other accounts, with a twist. Called the “Small Sacrifices” tool, you can pre-enter how much you would save from, say, buying a regular coffee instead of a medium latte. Then every time you decide to make that sacrifice, you can log in and have the savings associated with that choice transferred to another account.

Not everyone is ready to go cold turkey with their pricey habits, but unless you actually save the savings, you’re not making progress. Like eating a bacon double cheeseburger after a 10K run, that’s a lot of pain with no real gain.


Saving: 10 things you need to know

July 26, 2012 § Leave a comment


By Madhavi Acharya-Tom Yew

There’s a reason why the saying ‘a penny saved is a penny earned has been around a long time’ – it’s true. Saving money can feel like hard work. But there’s no mystery to it. From getting started with a budgeting to setting goals and paying yourself first, here’s what you need to know.

1. Create a budget

Question number one is to get a handle on how much you’re bringing in and how much is going out before you can decide how much you should be hanging on to. Get all your bill stubs ready for this exercise – and be sure to include what you spend on your morning coffee run, and all the other little incidentals. The Investor Education Fund has an  easy worksheet  you can download. 

2. Ready, set, goal

Are you saving for retirement, or a trip to Las Vegas? You may want to do both. Fix the goal and the amount and aim for it. This will help keep you motivated. This Credit Counselling Canada calculator helps define savings goals and lets you decide how long it will take you to reach that goal, based on how much you’re putting away every month. Play around with different scenarios.

3. Pay yourself first

You’ve heard this one before. That’s because it’s the best way to save money. Try to put away 10 per cent of each pay cheque, preferably using an automatic debit on payday. If you can’t manage 10 per cent, try 5 per cent. Anything is better than nothing and you’ll be surprised at how easy it is. Build that into Step 2 when you are creating your budget. The power of  compounding will surprise you.

4. Start pruning

Cutting costs should start with the big stuff first, because that’s where you find the biggest amounts. Can you save on housing or car costs? Maybe you can get a better deal on your or home insurance rate. Perhaps you can try and manage with one car. Do you need all those extra cellphone features? Cut back on a tier of cable TV. What do those daily cups of coffee and weekly magazines really mean? Industry Canadahas a nifty tool that tells you. 

5. Get to know your debt

Figure out how much your owe. Be honest. If you can pay down your debt faster, you’ll save money on interest charges.

6. Clamp down on credit

People tend to spend more on credit. Why? Because it hardly feels like you’re spending at all. It’s easy. Stop using your credit cards, or at least use them wisely. Have a look at this Credit Canada calculator which shows you how bad it can get.

7. Shop wisely

Impulse buys can be killers, whether at the grocery store or Winners. There’s nothing wrong with buying something you want, but think about it a little first. Maybe the best time to buy Muskoka chairs is November when they’re on sale and not May, just as summer is beginning. Comparison shop. Use coupons. Maybe it’s cheaper online or second-hand. Check out Craig’s list and Kijiji and ask your friends if they have an extra or can point you to a good deal.

8. Pay your bills on time

You’ll save on interest charges and those annoying service charge fees. And always pay more than the minimum, especially on credit card balances. If you have a $1,000 balance on a credit card that charges an annual interest rate of 18 per cent, and you only make the minimum $10 payment each month, it will take 10 years to pay it off. And by then you’ll have paid nearly $800 in interest. This calculator will help you run through better payment schedules.

9. Make extra mortgage payments

Your mortgage is probably your biggest debt and the faster you pay it off the better. Make payments every two weeks, rather than twice a month. It’s a small difference, but you’ll squeeze in two extra payments per year that can go straight to your principal. It may not sound like much, but it can save you thousands over the life of your mortgage. This calculator tells you how much you can save buy making an extra payment.

10. Start now

Compounding is like magic. A 20-year-old who saves $1,000 a year, with an annual 6 per cent return will have just over $240,000 at age 65. Start at age 30, and the same investment will earn just over $126,000 for retirement. Play with the numbers .–saving-10-things-you-need-to-know

Good for homeowners – and the economy

July 16, 2012 § Leave a comment



Could Canada could slip into the same traps that hurt the U.S. economy in 2008-09? Some are sounding the alarm bells – at least on the housing front.

Clearly, Ottawa is worried about the debt levels being carried by the average household. Witness Finance Minister Jim Flaherty’s recent announcement that he was changing the maximum amortization on a government-backed mortgage to 25 years from 30 years.

The announcement was greeted with mixed reviews, including loud criticism from those who worry younger generations will have a significantly harder time being able to afford first homes.

But reducing the limit for mortgage amortization is not only good public policy – cooling the speculative real-estate sector without killing the home-construction industry – it is good for homeowners in general. Here’s why.

U.S. banks and lending institutions took part in two inappropriate activities in the U.S. housing and mortgage market prior to 2008, both passively allowed by the government in the hope of assisting low-income Americans to own their own homes.

First, banks were offering mortgages with low introductory interest rates that would later (one to three years later) rise to higher ultimate rates. Second, banks were offering mortgages at very high ratios to the value of the house (even up to 100 per cent). This was all fine – for both banks and home owners – so long as incomes and house values rose.

It all came to a thunderous halt in 2008.

As homeowners’ mortgages with low introductory rates came up for renewal, many could not afford the new higher payments that went along with the higher ultimate rates. Americans had to walk away from their loans, and therefore, from their homes – in droves.

At the same time, for those who had leveraged a very high percentage of their home value in their mortgage, the falling house prices meant that they now had a mortgage with an outstanding value that was larger than the value of the house. So, they too, simply walked away, handing the keys to their homes to the lending institutions.

This all snowballed into the exponential fall in American home values in 2008-09, and the accompanying loss in value of the mortgage assets held by the lending institutions – a very important piece of the global financial crisis.

In Canada, we are fortunate that our successive governments have always forced higher down payments for homes here than those required in the U.S. With the new limits on the amortization period, our government wants to dodge the American crisis. This is prudent, and safeguards the economy in general. But the new limits are also good for the individual home owner.

Let’s do some arithmetic. Consider a $100,000 mortgage. (Most mortgages are much larger, but you can get to the answer to your personal situation easily by multiplying by the size of your mortgage.) I will assume today’s five-year mortgage rate of 5.24 per cent.

If you take out a mortgage to be paid off over 30 years, your monthly payment will be $548.10. Over 30 years, you will pay a total of $197,316, including $97,316 in interest. If, however, you choose the 25-year mortgage, your monthly payment is $595.34 ($47.24 more a month). Over 25 years, you will pay a total of $178,602 – $78,602 in interest, just 80 per cent of the interest you would pay on the 30-year mortgage. Further, you will own the house debt-free five years sooner.

If interest rates rise, the arithmetic becomes more dramatic.

Consider a $500,000 mortgage at 6 per cent. If you choose the 30-year mortgage, you pay $2,974.12 a month for 30 years, a total of $1,070,683, including $570,683 in interest. Using a 25-year mortgage requires monthly payments of $3,199.03 ($224.91 more a month) for a total payment of $959,709, including $459,709 in interest.

In other words, for an extra $7.39 a day, you can own your house five years sooner and pay a whopping $110, 974 less in interest.

If a home buyer cannot afford an extra $7.39 a day in mortgage payments, should they be in the market? Aren’t we all really better off with the shorter amortization period?

The bottom line: The impact of this new legislation is less pain than pragmatism. For once, we should be thankful to our big brother in Ottawa.

Building permits hit highest level in five years

July 12, 2012 § Leave a comment

New houses under contruction off Bayview Avenue near Pottery Road in Toronto are seen in this file photo.

By: The Canadian Press

Statistics Canada says municipalities issued $7-billion worth of building permits in May, up 7.4 per cent from April and the highest level since May 2007.

The jump followed a 4.4 per cent decline in April.

The agency says the increase was largely due to higher construction intentions for institutional buildings in Alberta, British Columbia and Saskatchewan and for multi-family dwellings in British Columbia.

he value of residential building permits increased 8.5 per cent to $4.1-billion, following four consecutive monthly declines.

Non-residential construction intentions rose 6 per cent to $2.9-billion after a 7-per-cent decline the previous month.

The value of building permits increased in seven provinces in May, led by British Columbia, Saskatchewan and Alberta.

Almost half of Canadians don’t know new mortgage rules

July 10, 2012 § Leave a comment


Many Canadians unaware of changes
Canada’s finance minister is moving aggressively to cool down the mortgage market, but it appears many Canadians aren’t paying attention.

Which may be one of the reasons consumers are carrying record debt burdens. The changes were announced with great fanfare, and both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have been pleading with Canadians to prepare for the inevitable rise in interest rates.

A survey by Bank of Montreal indicates that 49 per cent aren’t familiar with the new rules that take effect today, among them the reduction of the maximum amortization for a government-insured mortgage to 25 years from 30 years.

Just 45 per cent of those polled know that the new rule is 25 years, and 26 per cent still think it’s 30 years or longer.

It’s interesting that 66 per cent of the 1,000 people surveyed in late June and early July believe that they’re up to date on the latest of several moves by Mr. Flaherty, who is worried about the hot housing market in some cities, and the fact that the rate of debt to disposable income in Canada is at 152 per cent.

The BMO survey also showed that 14 per cent of potential home buyers see it less likely that they’ll buy a new house in the next five years, while 41 per cent of those who still expect to purchase a property in that time period say it’s now more likely that they’ll spend less.

And 45 per cent say it’s now more likely that they’ll opt for a smaller mortgage.

Does a minute matter in a real estate deal?

July 9, 2012 § Leave a comment

Sellers should vacate their home early on the day of closing.

By Mark Weisleder

The standard Ontario real estate contract says deals must be concluded no later than 6 p.m. on the day of closing. But if you’re a minute late, will that kill the deal?

On Friday, Nov. 30, 2007, lawyer Michael Gatien went to the Cornwall, Ont., registry office to register a deed on behalf of his client, who had just bought a plaza. He had wired the purchase funds to the trust account of the seller’s lawyer just after 4 p.m. and received the final go-ahead to register the deed at 4:53 p.m. But when he tried to register the deed, he missed the 5 p.m. deadline by one minute. The registration system would not accept anything after 5 p.m.

The seller then tried to cancel the deal, claiming the deed was not registered in time. The buyer’s lawyer argued that since all steps had been taken to close the deal, the deed registration could take place when the registry office reopened on Monday.

The sale had involved difficult negotiations and there were some hard feelings, which all contributed to the seller trying to cancel the deal. It went to court in March 2009 and a judge ruled the seller could not refuse to close.

Normally, real estate deals close when the money has been delivered from the buyer’s lawyer to the seller’s lawyer and title has been transferred to the buyer. Funds are usually sent by wire transfer. The seller’s lawyer releases the deed for transfer on the government computer registry system and the buyer’s lawyer then completes the computer registration.

Why does the standard agreement say that deals can be completed by 6 p.m. if the computers close down at 5 p.m.?

In order for the computer registration process to operate efficiently, lawyers for the buyer and seller sign an agreement that says all the money will be held in escrow until the deed gets registered. In many cases, buyers are waiting for their own sale deal to close in order to get the money to close their purchase. As a result, there is often not enough time to get the money wired into the trust account and to complete the electronic registration before 5 p.m. This is especially true at the end of the month, when many deals are closing on the same day.

As a result, in many cases, the deal closes after 5 p.m. “in escrow.” The lawyers agree that even though the deed is not registered, the buyers can move into the home, the seller’s lawyer will hold the money overnight in their trust account and the deed will be registered the next morning. This escrow agreement is typically completed before 6 p.m.

Can a seller get out of the deal if the money is not delivered to their lawyer before 5 p.m.?

While this did not occur in the above case, a judge will also look at the local practice of how real estate deals are conducted.

In another case, a buyer’s lawyer was late getting the cheque to the seller’s lawyer. The seller tried to cancel the deal. The court found that the seller contributed to the deal closing late by delaying the final closing visit of the buyer and not giving the buyer’s lawyer instructions as to how to make the cheques payable until late in the afternoon.

Another question that arises on closing is when does a seller have to let the buyer into the house?

This should happen as soon as title registration takes place and not later than 6 p.m. if it is an escrow arrangement. In one case, a buyer’s movers sat in the driveway from 6 p.m. on the day of closing until 9 p.m., waiting for the sellers to leave. It cost the sellers more than $1,000 to pay for the buyer’s additional moving costs, since they were late leaving the home.

Sellers also cannot leave junk in the house on closing. If they do, the buyer can sue to pay for the cost of removing it.

Sellers, vacate your home early on the date of closing and take everything with you. If you need more time, make changes in the contract at the time you sell it.

Buyers and sellers, do not try to change your mind and cancel a deal because a deed cannot be registered in time. Let your lawyers complete the escrow and move on.–does-a-minute-matter-in-a-real-estate-deal

Skipping vacation time is a potential disaster

July 5, 2012 § Leave a comment

By Sarah Barmak

Summer is here, and while a CEO’s thoughts should be turning to the beach, the idea of leaving subordinates in the lurch can sometimes make managers second-guess their much-needed vacation plans. For some bosses, setting their smartphones to airplane mode—even for a few hours—can feel like unnecessary surgery.

Unfortunately, skipping vacation time is a disaster waiting to happen, says Rick Kathuria, a former management consultant who’s now director of the project-and-vendor management office for law firm McCarthy Tetrault. He believes too many managers fail to take time to recharge—and risk burning out. “When I started my career, a mentor of mine was working crazy hours,” says Kathuria. “He was travelling the country, spending three or four nights a week in hotels. One day, out of pure exhaustion, he passed out in his room. He was in the hospital for two weeks.” While that might not have been his idea of a holiday, the executive did learn one thing: his team could function just fine without him.

For some bosses, getting away from the office isn’t a problem, but the anxiety of what might go wrong in their absence leads them to check their smartphones constantly. Some managers will set a window of a few hours a day where they will check their e-mail, though that isn’t always practical, says Jeff Chorlton, president and CEO of Flexserv, which provides human resources, IT and other consulting services to small and medium-sized businesses.“I do a lot of travelling to developing nations, where ubiquitous access to the Internet is not the same as in developed nations,” he says.

The best way for a boss to manage her time off is to appoint a second-in-command, says Kathuria. Or better yet, put two or three people in charge. “Don’t always have a single person as your backup. Have a person for this thing, a person for that thing.” And if you think there’s something that might actually blow up while you’re away, offer some contingency plans.

And try to relax. Ultimately, good things tend to happen when the boss goes away. David Yermack, a professor at NYU’s Stern School of Business, recently published a study of CEO vacation patterns at 66 large companies, and found that firms often experience abnormally high stock returns before and after a CEO took time off, presumably because they preferred to leave and return on high notes. And as for the fear that your staff might ground the ship like the Costa Concordia, it’s a long shot. Yermack’s study also found that share-price volatility declined sharply during a top executive’s absence.

“If you control everything, you tend to lose out on the breadth of knowledge at work in your team,” says Kathuria. And besides, even if something should go wrong, it could provide valuable information. Kathuria describes a situation where a co-worker had been grooming a manager to be her second-in-command. When a volunteer mission in Central America took her out of the office for several weeks, she left the would-be replacement in charge. The manager couldn’t cope with the workload. “As a result, she knew the person wasn’t her second-in command and she had to think of someone else.”

For those still nervous about leaving the office, there is another option, courtesy of Amar Varma, co-founder of Toronto mobile app firm Xtreme Labs. He likes his staff—all 150 of them—to take time off when he does.

“We shut down the office between Christmas and New Year’s,” he says. “It gives everyone downtime at the same time.” Just think: You could avoid the whole problem of leaving your staff behind by bringing them with you.–skipping-vacation-time-is-a-potential-disaster

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