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By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, December 16, 2001
As I began writing this column, I asked my wife for her thoughts
of merry. Indeed, she suggested writing about spending. Her answer
was a tad surprising, but perhaps she had a point. So I'm going
with it.
You could be patriotic and buy Canadian whenever possible. The
financial experts du jour all say that robust consumer spending
is a must to bring about economic recovery. It's also a safe bet
that your favourite merchants appreciate your visits.
However, this is the time of the year when Canadians incur considerable
debt. Often, the merry season results in credit cards creeping way
past their safe limits. Perhaps, even into financial ruin territory.
Investment counsel Adrian
Mastracci says,
“Ultimately, only you can set the spending boundaries suitable
for your circumstances.”
So, how do we prepare for the dreaded January moment
of reconciliation? These ideas assist in damage control:
- Pay yourself first. Put something into a saving account
each payday before you spend anything. Aim for 5% to 10%.
If possible, have it deducted directly from your pay. Out
of sight, out of mind!
- Build an emergency fund that approximates three to six
months of expenses. Use it for these purposes and replenish
it after using it.
- Establish an allocation for the merry season and try your
best to stay within your guidelines.
- Perhaps, one of yesterday's winners mysteriously sneaked
into your personally owned stocks and mutual funds (not the
RRSP/RRIF). If so, it may be time to take the medicine, sell
it and use the cash for your expenditures. If there is money
left over from a stock or fund the sale, pay off the highest
interest rate loans first.
- Consider transferring credit card balances to a line of
credit. The credit card rate is typically around 18%, whereas
a line of credit is likely under 6%. The interest savings
can accelerate the debt repayment. Say the credit card debt
is $5,000, the interest savings approximate $600 per year.
- Are you sitting down? A non-deductible 18% credit card
rate really costs you 30% before taxes at the 40% marginal
tax rate. Ouch!
- Don't get drawn into minimum monthly payments on your credit
cards. It will take forever to pay off the outstanding balances
at rates of 18%.
- Determine if refinancing the mortgage and consumer loans
to lower interest rates makes sense. Read the mortgage pre-payment
clause. It may allow additional lump sum payments or the doubling
up of the regular payment.
- Reduce the mortgage amortization from 25 years to the 10
to 15 year area. You'll save a bundle of interest. This is
your gift to you!
I'm reminded of one of my favorite commercials,
"Just because you have checks in your checkbook… doesn't
mean that…" Well, you know the rest.
Ultimately, only you can set the spending boundaries
suitable for your circumstances. Use your good judgment, stay
out of financial trouble and have a merry season!
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