However, you do need to be careful if you find yourself in a position to get a payday loan. Even though it seems necessary, there are some definite pitfalls associated with with payday loans. Here are two of the reasons they are so dangerous:

High Interest Rate

One of the biggest pitfalls associated with payday loans is the high interest rate. Payday loans come with very high interest rates. The rates can translate to as high as 300% APR — or even higher. These interest rates mean that you are paying money into someone else’s pocket, instead of using the money to benefit you. Paying high interest is a major drain on your wealth, and can lead to a worse financial situation later.

If you are caught in the cycle of high interest debt, it is difficult to get out because so much of your payment is going to interest, rather than reducing the principal. You continue to make payments, but the actual amount that you owe is reduced at a very slow rate. Imagine what you could do if that interest was placed in a TFSA, instead of lining someone else’s pockets.

Easy to Renew

Payday loans are so dangerous in terms of high interest rate because they are so easy to renew. Most payday lenders will let you renew your loan for another two weeks, or month, simply by making another interest/fee payment. If you borrow $200 for two weeks, you might pay a $20 fee now, and then be expected to pay the $200 later. However, when the due date comes around, you realize you still don’t have the $200. You either end up defaulting, or you can extend by paying $20. It seems easier to pay the fee to keep extending, because it’s a smaller and much more manageable amount.

On top of that, some payday lenders will allow you to borrow even more when you extend. So you pay a slightly bigger fee, but you are able to borrow more money, and you can soon find yourself extending that term out as well. You can see how this begins to be a trap. If you borrow a significant amount of money from a payday lender, you might never — without some serious changes and hard work — actually have the lump sum you need to pay off your obligation. But you can keep making smaller payments. After a few months, you’ve paid enough in fees to have gotten rid of the loan amount, but since you’re only paying fees (and not principal), you still owe just as much.

The ease of the process of getting a payday loan, along with the high interest rates and the ability to renew your loan, can cause problems for your finances. Payday loans can be dangerous to your finances if they become a habit.

Related Posts:

• Payday Loans
• 3 Different Types of Canadian Personal Loans and How They Work
• Pay Off Student Loans Or Save?

Why Payday Loans are So Dangerous originally appeared on Canadian Finance Blog on May 3, 2012.

Why Are You Going to School?

If you can’t answer decisively the purpose for your schooling, don’t get loans. I’m not saying don’t go to school, but if you don’t have a specific end destination in mind, then don’t get loans. I’ve met too many people who have gone through year after year of school, taking classes and paying a lot of tuition because they feel like they should be in school, not because they want to be. They have no end career in mind, and no plan for after they graduate. It’s just the next phase in life for them, and going into debt just seems part of the “thing to do”. Don’t be that person who ends up regretting their college years. If you’re wondering about a program, or want to go to college to be with some friends, or just want that college experience – great! Just pay for it with cash and not with some form of credit. Go to school part time if you have to, and work the rest. Or, just delay your schooling for a year and save up the cash for the tuition ahead of time. Not only will you be in a better financial position at the end of the school year, but because you worked so hard to earn the opportunity, you’ll be far more likely to actually learn what they’re teaching.

What Will Your Post-Schooling Income Be?

Becoming a doctor is a famous example of this. You go through about a decade of schooling before you become a doctor, so chances are really good that you’ll be racking up the student loans along the way. However, once you’re done that schooling, you’ll be starting at a fairly decent salary that will help you pay off those student loans. So do some research on the job you’ll be applying for once you have your certifications. For example, if you’re currently working at Starbucks, and after your schooling you’ll be an intermediate accountant, well, then you can consider getting some loans during the transition as it will eventually help your financial situation. If, however, after you completed your bachelor of arts in English, you’re still going to be working at Starbucks, then perhaps make sure you have the cash to pay for your classes as otherwise you’ll end up in an even worse financial position.

All of this is to say – consider long and hard before you sign any papers saying that you’re willing to go into debt. Be so sure about that decision that you’ll be willing to take on a huge burden in the future. There should be no shame in not knowing your finally goal or you final destination. Just don’t sabotage your future because you are hoping that things will just fall into place. Instead, create for yourself a history of hard work and paying in cash for the things that you want – and that includes any schooling or training you may need or want.

Related Posts:

• Pay Off Student Loans Or Save?
• Finish College Without Student Loan Debt
• Payday Loans

When Are Student Loans Worth The Debt? originally appeared on Canadian Finance Blog on February 22, 2012.

Becoming Debt Free

Why should you want to become debt free? A lot of people are perfectly happy living their entire lives in some form of debt. Personally, I want to become debt free because that frees up a lot of my income for other purposes. Or, as long as I stick to the plan of spending less than I make, I can reduce the number of hours that I would have to work in order to do so. When you’re in debt, you pay a daily amount of interest on all of the money that you owe – money that you need to earn in order to pay back that loan. If you didn’t have to pay back that money, you wouldn’t have to make it in the first place.

Paying Off Your Debt

So what’s the best way of paying off debt? Like almost everything else in personal finance, there’s lot of options and opinions. Some like the idea of a “debt snowball“, where you make minimum payments on all debts, and left over monthly money goes to the debt with the smallest balance. Once that debt is paid off, you re-purpose that minimum payment, alongside the leftover cash at the end of the month, towards the next small debt. This process continues until all debts are paid off. The pros of this method is that all of your debts will get paid, you will feel the sense of reward the quickest, and your monthly payments won’t shift much over the entire length of time you’re paying off that debt. The cons is that the smallest balanced debt may not be the highest interest debt, and potentially you could end up paying more overall than if you paid off the highest interest debt first – a second and also popular method. My preferred method is to make minimum payments on all debts, and make greater than minimum payments on one balance. I don’t like the idea of using all leftover money at the end of the month towards debt because I find it unsustainable. If I work hard and spend frugally, I want to be rewarded for my hard work, and not just see the money that I saved disappear. So instead I force myself to be good by setting up an automatic payment for greater than the minimum balance on a debt, ensuring that I am making good progress towards reducing my debt.

The second most important thing you can do towards becoming debt free is by making lump payments on your debts. My wife and I have done this recently. Basically what we did was when we came across some extra cash that we did want to put towards something, we put it aside in a separate bank account. This kept it from being accidentally spent from our main chequing account. We did this a couple of times, and eventually had a nice little lump sum sitting there. One day  while going over our finances we realized that the lump sum was approximately equivalent to one of our debts. So we just paid it off, completely. In one fell swoop we erased another monthly payment with money that was just sitting around, waiting for a purpose. If you ever come across lump sums of money, put them towards your debt – especially if it pays the rest of the debt off. It’s an amazing feeling.

This personal finance “basic” will come at different points for different people. Some may not reach it until retirement, when they sell the house, pay off the rest of the mortgage, and move into their children’s house. Others may be free out of college, completely debt free because they took it slow and worked part time alongside their schooling, and have no intention of ever going into debt. As such, remember that personal finance is very, very personal, so set a goal for yourself when you want to become debt free, and start working towards it, one small payment at a time. The best thing you can do towards becoming debt free is simply start to move in the right direction, and then let the rest happen over time. As long as you’re spending less than you’re making, you will be well on your way to becoming debt free.

Are you debt free? When do you want to become debt free?

Related Posts:

• Personal Finance Basics: Build an Emergency Fund
• Personal Finance Basics: Automatic Withdrawal For Your Savings
• Personal Finance Basics: Spend Less Than You Make

Personal Finance Basics: Become Debt Free originally appeared on Canadian Finance Blog on February 8, 2012.

These days, I don’t know anyone who will discourage a young person from going to college. (Except me. Plug alert!) Haven’t you heard the studies? You know, the ones that say that college graduates make more than their lesser educated brethren? Or the ones that argue the difference can be as much as a million dollars over a lifetime? If you’re not going off to get some sort of higher education, you’re missing out.

I won’t discourage anyone from attending post secondary if they want to. Higher education is a noble goal, and often one that will directly result in higher wages, since we live in an increasingly specialized world. Often, companies won’t even look at a prospective employee if that person doesn’t have the relevant university degree. A college degree is becoming the minimum barrier to entry in a lot of fields.

Keep in mind though, there are alternatives, especially for those poor students out there. Trade school generally takes a fraction of the time a full university degree does. You can start at the bottom rung of a big company with the assurance that you’ll eventually move up the ladder. You can even take a few years off to hone your ability to study. The possibilities are endless.

But we’re not here to talk about the pros and cons about getting a degree. We’re here to talk about the crippling debt levels.

Massive Debt

The percentage of high school graduates who go on to take college courses is at a record high. And, partially as a result of all this demand, debt has also reached record highs. It’s not uncommon for 22 year old kids to finish their university programs with $30,000 to $50,000 in debt, and that’s just from (comparatively) cheap Canadian schools. Students from ultra-expensive private schools often graduate with 6 figures in debt.

And then, we have the for-profit schools in the United States. (Also in Canada. But there’s not nearly as many of them.) These money making institutions often push strictly online courses, since housing students in virtual classrooms is considerably cheaper than real ones.  These schools allow you to study at your own pace, a great solution for someone who wants to work and get a degree at the same time.

There’s just a couple problems. Firstly, they’re expensive. To counter that, students do what they’ve done for decades – take out loans. These schools make it easy, often holding the student’s hand throughout the whole loan application process and encouraging them to take out as much as they can. Hey, it’s good business to make sure your customer doesn’t run out of money halfway through purchasing your product.

There’s just one problem. Dropout rates at these types of colleges are huge. There are many reasons for this. It’s tough to work and go to school at the same time. If you’ve ever seen the ads promoting these schools, they’re often directed at people who don’t have a whole lot of education to begin with, or people who have been out of school for years. These people aren’t typically the best students. These people often end up with nothing more than a shattered dream and high student loans.

College debt is getting to the point where people can’t afford to take on the level of debt required to get the education.

Worthless Degrees

And then we have people who are taking on all this debt to get a degree that has very little potential to be leveraged into anything more than pouring coffee. Usually these degrees are in the arts, but there are exceptions. Or, so many people are getting into a field that they’re creating an oversupply of workers, kind of like the tech industry circa about 2003.

Which brings me to an interesting theory. As economic conditions worsen, young people can’t find jobs. So instead of joining the workforce, they go to school. Some will enrol in an undergrad program, while others will continue their education and take their masters. At some point, all these people will enter the workforce. And, since education is an investment of time as well as money, often these graduates will enter a decent job market. But, the job market improves for everyone, not just college graduates.

With college participation rates sitting at record highs, is this the peak for education? Or, will society continue to specialize to the point where everyone has to get some sort of degree? The comment section is all yours.

Related Posts:

• Finish College Without Student Loan Debt
• 3 Ways for Kids to Start Saving for Their College Fund
• Money Saving Tips for College Students on a Budget

Is College In A Bubble? originally appeared on Canadian Finance Blog on January 12, 2012.

Of course you did. To recap, the bursting of the American housing bubble helped lead to a liquidity crisis around the world, culminating in the collapse of Bear Stearns and Lehman Brothers, as well as the bailout of the entire U.S. banking system. As an interested market observer, those few months were absolutely riveting. There were legitimate concerns the whole financial system was going to collapse.

Essentially, the crisis was caused by liquidity, or a lack thereof. For those of you who need an explanation,  liquidity is a person (or business’s) ability to raise cash when they need it. The reason why so many personal finance bloggers stress the emergency fund so much is because it serves as liquidity during times of need. Since banks don’t make money on cash reserves, they typically don’t keep a lot of cash just kicking around. They lend it out, often using leverage to lend out their reserves many times over. When business is going well, this is an effective strategy for making money. When things aren’t going so well, these creditors refuse to lend the money needed. When liquidity dries up, disaster happens, and banks go under.

Record Debt Levels In Canada

Seemingly every quarter, Canadian households set a new record for indebtedness. In the 3rd quarter of this year, Canadians debt levels sat at 152.9 percent of their disposable income. In fact, according to Bank of Canada Governor Mark Carney, household debt is Canada’s greatest financial risk, at least domestically. One in ten Canadians are in serious danger of defaulting on their debts, meaning that greater than 40% of their income is being used to service their debt.

Considering how low interest rates are, this is an alarming development. Canadian debt to income levels have passed both the U.S. and U.K. record levels, which peaked in 2007, just a year before the big financial crisis. For many Canadians, just a few weeks without a steady paycheque would spell financial disaster. They just don’t have the liquidity required to weather any sort of financial storm.

If you combine record debt levels with record Canadian home prices, it seems Canadians are walking a treacherous financial tightrope. If interest rates ever go up in a significant way, many Canadians who are living on the edge may be knocked off that ledge.  At least in this author’s opinion, this can’t end well.

European Debt Crisis

Meanwhile, we have a bit of a situation over in Europe. Greece, as we all know, is a fiscal disaster. The country has been bailed out by the wealthier members of the European Union several times, and they’re still not out of the boat. Spain, Portugal, and Italy are among the countries that have government debts exceeding 100% of GDP. The market is concerned about default, so it’s making it more and more expensive for these nations to issue debt, in the form of higher interest rates.

To make matters worse, there are beginning to be concerns about the rest of the European Union. I’ve heard rumblings that Belgium and France will be the next countries to run into debt problems. At what point does the European Central Bank admit defeat, and just let these countries default on their debt? Sure, it would mean the collapse of the Union, but they don’t have unlimited amounts of capital to bail everybody out anyway, unless they start printing the money. This would in turn create inflation, hence devaluing the Euro.

Unless the entire European union manages to get their government spending under control very quickly, this situation could end very badly. I’d avoid all investments in Europe, especially financials.

Meanwhile, There’s Japan

Many people mistakenly assume the country with the highest debt to GDP ratio is the United States. While the United States is high, Japan’s government actually owes more as a percentage of GDP.

Many smart economic minds aren’t concerned about Japan, since most of their government debt is held by its own citizens. (unlike the U.S., who actually lists Japan as one of its largest creditors) Since Japan has had a solid personal savings rate throughout the years, their citizens have the excess capital to buy government debt.

This is changing.

Japan is the oldest country in the world. They are slowly losing people, as more die than are replaced. Immigration into the country is practically non-existent. Soon, they’ll have more people collecting pension benefits than are contributing to the system. Since more and more people will start drawing from their savings, this will quickly turn the savings rate negative. Without their own people to buy the government debt, Japan will have to depend on foreign investment. Japan’s balance sheet is in worse shape than Italy’s or Spain’s. This foreign investment will be expensive, if it even happens.

What Does This Mean For You?

If a massive European or Japanese debt crisis happens, the pain will be felt all over the world. North American stock markets will take it on the chin. Investors will run to the exits, since defaults in general kind of make them nervous.

I’m not going to tell you what you should do with your money, because that’s ultimately up to you. I’m selling some winning positions, and sitting on a little more cash than usual. I think, a year from now, there will be a cheaper stock market out there. What do you think about the record debt levels? Will we see defaults in the near future? Or am I some sort of weird crazy guy?

Related Posts:

• Avoiding Financial Disaster – New Work, No Debt
• Frugality Can Lead to Happiness
• How To Avoid Personal Financial Disaster: These 22 Tips

Will Record Debt Levels Lead To Disaster? originally appeared on Canadian Finance Blog on December 19, 2011.

Very few students can afford to pay for post secondary education without some type of financing in place.  Canadian students are graduating with more than $20,000 in student loan debt, which is seriously affecting their financial position as they enter the workforce.  Should young people make it a goal to pay off student loans right away, or save money to help improve their finances down the road?

My Experience With Student Loans

My wife and I left University with nearly $60,000 in student loans to repay.  I was fortunate enough to have purchased a house when I was 19 (with my parents co-signing), and after University I sold the house for about a $30,000 profit.

Instead of using the proceeds from the house sale to pay off student loans, which would leave us with no savings, I paid off a portion of our debt and used the remainder for a down payment on a new house.

That house doubled in value in the eight years that we owned it.  We leveraged an asset, which gave us more potential for financial gains that would not have been possible had just paid off our student loans.

Paying The Minimum

There are plenty of financial pressures facing young people these days.  Most new graduates are worried about getting a job in their field, finding a suitable place to live, and making car payments.  Paying down your student loans doesn’t need to be an initial priority in your life.  Here are a few reasons why:

1. The interest rate is low – If you choose the floating rate option the interest rate on your National Student Loan will be prime + 2.5 percent, which currently equals 5.5 percent.  Provincial loans are at prime rate which is currently at 3 percent (Newfoundland does not charge interest on student loans)
2. Income Tax credit – Any interest paid on your student loan is eligible for a 15 percent Income Tax credit.  So if you paid $1,000 in interest over the course of a year, you would get $150 back on your Income Tax paid
3. Cash Flow – Why use all of your cash flow to pay off student loans when you could be establishing an emergency fund, saving for a down payment on a house, or paying off higher interest credit card debt?

Pay Off Student Loans On Your Terms

My approach to paying off student loans was to make the minimum monthly payments initially and then increase the payment each year as our finances improved.  We each had two loans (Federal and Provincial), and when one of the loans got within striking distance ($2,000 or less), I took some of our savings to pay it off, and then applied the freed up cash-flow to a different loan.

While we could have paid off our student loans faster, I thought that we would be better off investing in our RRSP and TFSA, or paying off our mortgage.

Surprisingly many smart graduates say that their student loans aren’t costing them a lot of money, so they decide to just pay them off early.  However a loan this cheap doesn’t need to be paid off more quickly than necessary.

Top priorities for young graduates out of school should be to eliminate any high interest rate debt and then to build up some savings inside a tax free savings account.  Doubling, or even tripling your monthly payments in an effort to pay off student loans early is a lot for a young graduate to take on.  There’s no need to place an unnecessary burden on yourself with many other priorities to look after.

Do you think the top priority for new graduates should be to pay off student loans, or should they concentrate on building up their savings?

Related Posts:

• When Are Student Loans Worth The Debt?
• 3 Different Types of Canadian Personal Loans and How They Work
• Why Payday Loans are So Dangerous

Pay Off Student Loans Or Save? originally appeared on Canadian Finance Blog on December 6, 2011.

“Once I Pay Off the Collection Agency, It Will Leave my Credit Report”

Wouldn’t that be nice? In most cases that’s not true. Once you pay off a debt that was in collections, the best you can hope for is the debt to be listed as “closed” but often it’s listed as “paid collection”.

When an account is listed as a collection, it remains on your credit report for seven years. Once you pay the debt, it is listed as “paid collection” for the remainder of the seven year period. It may be a bit of good news to know that the seven years doesn’t start over. The other bright spot is that an account listed as a “paid collection” is not as bad as an unpaid account that was referred to a collection agent.

“I make my minimum payment. That’s good enough”

Not true. Although paying the minimum balance is certainly better for your credit than not paying at all, those outstanding balances are strikes against you when your score is calculated so paying off the debt in a timely manner is the only way to help your credit score.

“Only errors involving money affect my credit score”

Once again, not true. What if your credit report has a wrong middle initial and the information in your credit report is actually the information of somebody else with a bankruptcy on their report? Fixing errors on your credit report takes a lot of time and if you wait until you try to qualify for a loan, you may have to reapply at a much later date. Check your credit report today.

“I shouldn’t shop online because it’s not secure.”

This one may be true but there are ways to check. Any time you are entering sensitive information in to a website look at the address at the top of your internet browser. If the address begins with “https” the site is secure and you’re safe to shop online. If it only says “http” do not enter any information about you or your credit card.

“Debit cards are as safe as credit cards”

Fraud protection and other safeguards that come with credit cards are quickly being adopted for debit cards but your debit card is a direct line to your bank account where a credit card is not. If somebody steals your credit card information, they may run up a balance but you still have money in your bank account until the problem is resolved. That’s not the case with a debit card. Be careful

Remember…

Don’t believe everything you hear and verify everything, including the information in this article, with a trusted source before you make financial decisions based on it.

Related Posts:

• A Line of Credit, A Car Loan, and More Lies
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Five Lies About Your Credit Report originally appeared on Canadian Finance Blog on November 14, 2011.

Schools don’t teach money management. They teach algebra, calculus, and geometry and although each of those is useful for developing abstract thinking, these skills have little practical purpose when it comes to everyday money management. (When was the last time you used a quadratic equation?)

If you want your children to someday become independent adults you have to teach your children these lessons. What should you teach your children about money? Here are a few ideas.

Saving

Teach your children that money isn’t meant to be spent, it’s meant to be saved so the person later has options. Those who save have little exposure to economic events because saving gives a person options. The nation’s richest people are often vilified but most are rich because they’ve managed their money well and that first starts with savings instead of spending.

Pay your Credit Cards off Each Month

Ideally, cash would be the ideal way to live but in a digitized world, cash is becoming less practical although still very possible. Teach them that if they’re going to use a credit card it must be paid off in full each month and if they find that they can’t do that, get rid of the credit card and only use their bank card or cash.

Where Does Money Come From?

Money comes from work. It doesn’t come from government assistance programs, the lottery, gambling, or get rich quick schemes. Money is the direct result of working hard every day. This lesson is best taught practically. If your children want money, they should do something around the house to earn it. Since education often equals higher paying jobs, pay them to reach the highest educational goals.

Giving

Money should be saved but it should also be used for the good of society. Teach your children to find valuable, true needs in the world and donate. Set up an account in their name on sites like Kiva to allow them to understand the power of giving. Although Kiva isn’t a true donation, it allows them to lend it back out to somebody else in need making the giving perpetual allowing your children to continue learning this lesson over time.

Live By Example

What’s the best way to teach your children how to be good money managers? Live the life and show them real world examples of how you save today for prosperity tomorrow.

Kids who don’t learn how to manage money become adults without the skills needed to live prosperously. Prosperously doesn’t have to mean rich. It only needs to mean comfortable and with the ability to purchase what you need without resorting to credit cards and for those who hope to be among the nations wealthy, spend less and invest more.

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• Why It’s Important To Teach Children About Savings
• What Do Garage Sales Teach Us About Money?
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Want Your Kids to Manage Money Well? Teach Them originally appeared on Canadian Finance Blog on October 24, 2011.

If you’ve ever applied for a car loan, one of the items you look at first is the interest rate. We all understand that the higher the interest rate, the more money we will pay in the end but let’s look at a few other facts about interest rates that you may not know.

Simple interest is not as SIMPLE as you think

Simple interest is the easiest type of interest to understand. If you loaned a buddy $100 and told him that when he pays you back, he has to pay you $106, you charged him 6% on the loan. In finance terms, simple interest is calculated by multiplying the principal amount (100) times the rate (6%) times the amount of time (let’s say 1 year) 100 X .06 X 1 = $6. Pretty easy.

Banks are much more savvy than that, though. They aren’t going to give you $10,000 for a car and charge you 6% each year spread equally between interest and principal. They front load the interest in case you pay the $10,000 off early. If you looked at the amortization table that came with your loan documents you noticed that more interested is factored in to the first few years of the loan and as you reach the end, it becomes almost all principal.

This is far from “simple” and if you saw the calculations, you would agree. If you didn’t know what an amortization table was before now, just remember that it lays out how your total payment is broken down. If you want to see how interest is frontloaded in your loan, you can create your own amortization table by going to www.amortization-calc.com.

If you own certain fixed income investments the interest being paid to you is paid using a simple interest formula. You can reinvest your dividends (called the coupon) if you would like but it’s not compounded within the investment itself.

Compound interest IS SIMPLER than you think

Compound interest is more difficult to calculate and for most of our purposes, the way it is calculated isn’t overly important. Since there is a seemingly endless supply of compound interest calculators, we won’t worry about the particulars but here’s what you need to know when you’re shopping around: Unless you’re working with six figure numbers, the type of compounding is unimportant. Let’s look at an example:

I found a compound interest rate calculator at webmath.com and came up with these figures:

Let’s say that you have $50,000 in a 1 year Guaranteed Investment Certificate at 5% interest that is compounded monthly. After one year you will have in your account $52,558.09.

Now, let’s say that you have that money in a GIC from a different bank but the interest is compounded daily. After one year you will have in your account $52,563.37.

Although many unknowing consumers find themselves comparing the different types of compounding, in reality, it makes very little difference. Some may argue that if you’re investing in GICs for 30 years that $5 difference adds up. It’s true. Over 30 years that would be about $674 but once 30 years of inflation eats in to it, that $674 is far less impressive.

Look at the “Y” instead of the “R”

When comparing loan rates, don’t look at the APR. The APR or annual percentage rate is the amount of money you would pay or receive if the interest was calculated using simple interest. Since the APR doesn’t account for any compounding, look at the APY or annual percentage yield. The APY takes into account the type of compounding used.

For example, if a car dealership offered to finance a $10,000 loan at a 5% APR, you could go to another dealership and get the same APR but pay those couple of dollars more per year because of the compounding. A $10,000 loan at 5% compounded daily has an APY of 5.13% but if it is compounded monthly the APY is 5.12%. (By the way, the difference annually is all of $1.05)

Don’t Count on Compounding

If you’re investing, there’s no doubt that when you reinvest your returns over time, compounding does wonders for your portfolio. You can’t live on your RRSP contribution alone for entire retirement so you have to rely on compounding to grow your nest egg.

However, you can’t use compounding as an excuse to not take an active part in the management of your retirement plan. If the world markets have another meltdown, compounding isn’t going to save you if you’re close to retirement. Make sure you have a qualified and more importantly, approachable investment advisor.

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What Is Simple Interest and Compound Interest? originally appeared on Canadian Finance Blog on September 12, 2011.

Here we’ll look at 3 common personal finance beliefs and dispel the myth behind them.

Myth: A credit counselor is required to repair credit.

This is not true. You can repair your own credit using patience and fortitude. Credit companies can help, but they can virtually do nothing that you cannot do yourself. The first thing is to order a free credit report. Northern Credit will give you one free report per year while TransUnion Canada and Northern Credit Bureau will provide them as requested. Report any errors in writing to each of the agencies. You can contact credit companies and work out a plan that can fit your income. You must be willing to show income statements, a budget and a plan. You may be able to re-negotiate the debt.

It is a myth that by closing accounts you can get more credit score points. Dropping a card may actually reduce your credit. It’s important to show that you are paying off credit with credit on time. If you already have or wish to apply to get airmiles card, it is one of the best reasons for having a credit card as it allows appreciation in travel miles. Do not get a new credit card if you are already in debt.

Myth: Interest rates will rise. This is the time to buy a house.

The Canadian housing market has been robust, resilient and growing. It has managed to remain outside the speculative quagmire that has snarled housing sales for our southern neighbour. The Canadian Real Estate Association changed a previous negative sales forecast to now show a 1 percent increase in sales, predicting 450,800 homes for 2011. CREA has reported only a 1.6 percent drop in sales from a year ago same period. The current average sale price, $363,500, represents an annual 7.2 percent increase, with the Vancouver market driving the lead.

Would one be desperate to rush into the market while interest rates are at their lowest? The Toronto-Dominion Bank reports home inspection rates and mortgage pre-approvals are several points down from last year. The Manpower job outlook for Canada, backing up home sales, appears positive.
This may very well be the time to get into the housing market. Due diligence must be pursued. Investigate and compare rates across the various provinces. One must understand that the Canadian economy is also part of a world macro-economic frame that is still under correction.

Myth: A college education bears multiple values.

Total student debt has been estimated at $20 billion, and student loans owed to the government increase by $1.2 million daily. With tuition rates uncharacteristically rising, up to 27 percent of students graduate with over $25,000 in debt. Defaults on the 8 percent government loans can easily compound a $30,000 loan into a $60,000 debt.

Graduating students are being forced to delay careers by taking up low-paying jobs outside their specialties. With no opportunity to build individual wealth, these students are unable to obtain credit to buy automobiles or homes.

Is college the way to go? A family’s personal finance figures importantly on planning foreseeable costs for college education. While some pundits point to a job market demanding college degrees or diplomas, others are saying the resulting student debt burden outweighs the benefit.

There’s a variety of non-repayable resources available when planning for education, just as there is a line of thought that a worthwhile profession can be obtained outside college. The family or individual must take a detailed, personal look at career prospects before committing financials or signing loans. Get a copy of “Canada Job Trends Update 2011” and go to the Working in Canada government site, among others, to obtain practical views of job outlooks

Related Posts:

• Recommended Personal Finance Books
• Challenging Personal Finance Assumptions
• Back To The Basics Of Personal Finance

Dispelling 3 Personal Finance Myths originally appeared on Canadian Finance Blog on September 1, 2011.