≡ Menu

Reader Mail: Fixing my Past Spending Mistakes…

The reader mail just keep rolling in, if I haven't gotten to your email question yet, I will get to you soon.  Today's story is from Sean, a Vancouver BC native.  From his email, it seems that he was a free money spender in his younger years (like a lot of us).  However, Sean at 31 years old, is now starting to turn his financial picture around.  Here are the details:  

At 31 years old I am admittedly entering the multi-million dollar march a little late, though hopefully there are a few tricks I can learn to maximize my efforts going forward and ending in a decent retirement.  I realize you are not a professional advisor, nonetheless I would appreciate your opinion(s) and the opinions of your readers with regards to defining and creating a winning strategy in my finance area. Here is a little about me:

  • $54,000 gross salary (net $2900/mo)
  • Only debt is a 1 month old $3,000 personal loan @ 11% w/ $276 pmt (to put something recent on my bureau)
  • Total monthly expenses are $1,596 (inc. loan pmt & rent)
  • Mastercard with $1,500 limit @ $0 balance (Secured by 2yr Term deposit &earns 3.5%)
  • No RRSP w/ $48,000 contr. limit
  • No cash savings or investments
  • FICO score @ 5708.
  • Single / no dependants
  • have left the party / excessive spending habits scene and am focused ondoing what it takes

GOALS:

  1. maximize savings & interest on savings
  2. increase FICO score
  3. maximize tax returns for re-investment
  4. position myself for 20% down payment on a mortgage (pre-qualified for $220k)
  5. would like to use the Smith Manuever

My thoughts on direction; start moving my total net monthly income ($2900) into a high interest savings account @ 4+% to earn the interest on all of my income as much as possible. Use my mastercard for all monthly expenses, making 1 payment ($1,500 / month) on my CC when the bill comes which should get me off to a good start on raising my FICO score (so I'm told). Maximize my RRSP /yr and invest returns into the RRSP.  Reading the posts on you're site and others have uncovered many strategies that I can go with, though I really don't know much about financial matters and am quite overwhelmed by it all as the longer I wait to start…the less I have at retirement.
What would you do going forward if you were me?

Sean, I'd like to start by saying congrats on getting your financial matters in order.  It is never too late to start optimizing your finances.  It seems that you have the right idea, but i'll add a couple more. 

I see that you're starting to improve your credit score with personal loans, which should help improve your score in a hurry.  However, time and paying your Mastercard every month will also do the trick.

Unless you have a personal line of credit for an emergency fund, you should have some money put away to cover your expenses for hard times.  Check out my article on Emergency Funds – How Much is Enough?

After your emergency fund is established, I would forget about any other savings and, max out that RRSP of yours.  The reason being is that you plan on owning a home one day, and you can use the RRSP Home Buyers Plan to help you achieve this.  Under the HBP, each spouse can put $20k towards the down payment of their first home.  The great thing about the RRSP is that not only do you get tax deferred compounding of your investments, you'll get a significant tax refund that you can redeposit into the RRSP.

Once you get the $20k saved in your RRSP, you can either continue putting money in there, OR, start a non-registered account.  Whatever the case, keep yourself in the habit of saving and your financial picture will remain bright.

A concern of mine is, what kind of home can you purchase in Vancouver, BC for $220,000?  From what I hear, $450,000 buys you a starter home.  Even if that's the case, I wouldn't feel comfortable with a $220k mortgage on $50k salary.  For me, the maximum mortgage I would ever consider is 2 x gross salary. Although, I realize that I sometimes tend to be conservative when it comes to non-deductible debt.  Perhaps you should consider staying as a renter for a few more years, while building up your RRSP nest egg and income.  However, the whole picture changes with a common law and two incomes.

So this is what I would do:

  1. Continue saving like crazy.
  2. Continue paying ALL of your bills on time if not early.  This alone will increase your credit significantly.
  3. Build an emergency fund in a high interest rate savings account.
  4. After the emergency fund is established, put all savings, tax refunds, and extra money into your RRSP.  This will give you an option of using the HBP in the next few years.
  5. Continue living below your means.

That's my take on Sean's situation.  As stated in his email, he wants your opinion also.   

Any financial advice that I give should be taken as opinion only and not as professional financial advice

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 23 comments… add one }
  • mjw2005 September 20, 2007, 5:58 am

    2 x Gross salary is the max you would ever consider for a mortgage. Maybe that would work in Saskatchewan or New Brunswick but in Vancouver very ,very, very few people (or families) make $200,000 a year or more to be eligible for that $500,000 Vancouver house.

    But this is why I rent in Vancouver. It allows our family to save $2000 a month for investing…

    Anyways, my advise, Max out your RRSPs…put as much as you can afford in there and use the refund to build your emergency fund or pay of that $3000 loan….

  • FrugalTrader September 20, 2007, 8:33 am

    mjw, If I lived in Vancouver, I would also rent.

  • The Financial Blogger September 20, 2007, 8:39 am

    If I lived in Vancouver, I would move elsewhere ;-)
    Seriously, the plan is good but I would try to apply for another credit card in order to increase your available credit. If you max out your credit card every month (even if you pay it), your credit score will have a hard time to improve. However, if you have 2 CC with a total limit of 3K, you will never use more than 50% of your available credit. You should see a very positive result on your credit score after a year or so. Good luck!

  • Telly September 20, 2007, 10:51 am

    FT, I think your advice is perfect (especially the 2x salary bit) and I agree that if I lived in Vancouver I would rent as well.

    Sean, my husband and I were in a similar position as you only a few short years ago and have taken huge strides since. Not to worry, you’re nowhere near “too late”. :)

    On two separate occasions I have also taken out (oddly enough) a $3k personal loan and paid them off rather quickly. It should really help improve your FICO score. It did for me. If you can pay if off earlier, all the better since that interest rate is rather high.

    Like FT said, good for you – you are on the road to financial freedom – keep it up!

  • Canadian Dream September 20, 2007, 12:55 pm

    I generally agree with the advise from everyone else. What is getting my attention is that 11% interest on your loan. Sean needs to pay that off ASAP to maximize saving and interest on savings.

    So I would suggest a plan like this:

    Month #1 – Save all extra cash for an emergency fund in a high intest saving account. Get your bills on automatic withdrawl to ensure you never had a late payment again.
    Months #2,3,4 – Pay $1000/month towards that loan. After that you will have a larger monthly cash flow for savings. Take any leftover cash and start putting it into an RRSP account.

    If you plan to take out the money in a few years for a house you might just want to use a high interest RSP savings account. You don’t want any risk on the money if you need it soon.

    Then keep saving and do some reading. Decide if you really want to own a home or are ok with renting.

    Best of luck,
    Tim

  • Blain Reinkensmeyer September 20, 2007, 2:19 pm

    FT, these are great posts, I love the reads.

    I like Canadian Dreams advice, get rid of that loan as quickly as possible, 11% interest is a killer long term.

    Even starting the journey at 31 is better then not starting at all.

  • FrugalTrader September 20, 2007, 2:25 pm

    Guys, the loan isn’t for debt purposes, he’s using it to improve his credit score. Getting a small loan and paying it back on time every month does wonders for the beacon score. However, i’m not sure how necessary it is in Seans scenario.

  • Gates VP September 20, 2007, 3:24 pm

    Hey Sean;

    FT has it right on, but here are my $0.02

    I’d like to look at point #4: home ownership.

    Owning a home in Vancouver is simply not the same as owning a home. It’s worth realizing that these are two distinctively different goals before you embark on the journey.

    Owning a home is what I call a “default decision”. It’s one of those goals that “everyone has”, but it’s simply not right for everyone. You’re 31 and single, so it’s important to ask “do I need a home?” and “is owning a home really important to me?”. I’m asking b/c it’s important to double-check yourself before running off and making “default decisions”.

    Renting in Vancouver is way cheaper than owning b/c Vancouver is a premium city with premium real estate prices. The reason I ask is this: less money on a home = more money in investments. A home is an investment, but it also carries lots of overhead. If you have more money generating income for you, then you’re going to have more options. If you have your life savings tied up in a home, then you’re limiting your flexibility.

    That’s why FT talks about the 2x salary rule for mortgages. He doesn’t want to throw too many eggs in one basket, and if you look at his records you’ll see that he has money coming in from several places.

    Investing for retirement is about cash flow, and more invested monies generally means better cashflow. Owning a home doesn’t generally generate cashflow :)

  • Cannon_fodder September 20, 2007, 5:08 pm

    Gates makes a great point. I never had an emotional need to own a home. When I was on my own, I rented a fairly cheap, but acceptable, apartment and maxed out RRSP contributions and savings.
    To me a house was not practical – a condo would have been enough space, but I didn’t think they appreciated consistently enough and the condo fees could skyrocket faster than utilities; a townhome would appreciate faster but it was still more house than I needed; and a detached house would appreciate even more but would have been too costly and too big for my needs.
    There is nothing wrong with being the kind of person that feels more secure or sleeps better knowing they ‘own’, in partnership with the bank ;-) of course, their own home. But, I’ve also seen too many people captivated by the dream who don’t properly realise all of the effort and additional cost that is required with owning a home. It can be a noose around your neck.
    What happens if you get a job offer that would cause you to move? With an apartment, you typically give 2 months notice and their is no penalty. With a house, you could be stuck selling at the wrong time, paying 4.5% commission to take it off your hands, paying > $1k in legal fees and the rest…

    There are pros and cons to each – at least you are trying to become informed.

    Good luck on your journey…

  • Canadian Dream September 20, 2007, 5:33 pm

    FT,

    I understand the loan is being used to improve his score, but let’s face why bother? If he is saving money it will take he at least two years to get anywhere near a decent home down payment, by that time he should have a nice history of paying his bills and using his credit wisely. In the mean time, who cares how bad your FICO score is if your not going to use it to get any more credit.

    Just my thoughts,
    Tim

  • telly September 20, 2007, 7:01 pm

    CD,

    That’s a very good point. Sometimes we get caught up in our FICO scores but if we’re not planning to borrow, why do we care what our scores are beyond bragging rights?

  • Q Cash September 21, 2007, 1:16 am

    My question would be with a $54,000 income, why do you need to provide security for your $1500, zero balance credit card. Apply for another card (no fee, rewards, whatever) and take that $1500 earning you 3.5% and throw it in an RRSP.

    With a $16,800 surplus per year and RRSP room growing at almost $10K a year, try to make up about $12,000 K in RRSP and move yourself down a tax bracket. Take the tax savings and put it into a high interest savings account until you know what you want to do.

    I agree with the poster (sorry, forget who it was) who said “why buy, just because you think it is the thing to do?” especially in Vancouver, especially when you are single, and especially when you don’t know where you may be or want to be in ten years.

    With that said, the exemption on personal property is huge and the number one builder of wealth in Canada. The reality is most people always trade up, but if you are in Vancouver, can buy a decent condo and are prepared to downscale your expectations in a couple of years, maybe you try to buy now (I wouldn’t, but I don’t live on the west coast).

    Just a couple of thoughts late on a Thursday night.

    Q

  • Sean September 21, 2007, 3:14 pm

    Hi All,

    Thanks for the great feedback. Especially regarding the Rent vs. Buy…the calculators on the net and friends/family tell me to buy, but to be honest I don’t really want to (freedom to move). So thanks to Gates VP, I agree with you. I’m going to continue to rent and invest, invest, invest instead. Glad to hear that there is consensus on this and the decision is probably a good one.

    I am finding that a low FICO (570) is a terrible place to be, just yesterday it took me 2 hours to open a no fee banking & Interest First savings account with PC Financial, due to “no credit History”, they almost did not open the accounts for me! Wow, what a pain in the… adventure.

    I am pretty much forced to provide security deposits on ANY type of credit. Which is why I want to improve this. Applying for another card (no fee, rewards) is not an option for me right now as my credit history is pretty much non-existent (lived on cash my whole life so far, only used a bank for paycheque deposits).

    Aside from my bank securing a mastercard for me; I did find another institution which offers a secured Visa (in case anyone is in a boat like mine) http://ww.hometrust.ca offers a card with security deposit starting at $1,000. Mind you it has a $39 1-time fee and $7.50/mth Admin fee…but what can we do with a low fico score, it’s only for a couple of years right! then apply for a no fee card later. ;)

    I have read in other posts that most people do not have or use an LOC for emergencies…I can’t do that as my score is too low, even with a higher interest rate. Thanks to FT for the RSP emergency fund idea, did not think about that and also keeps the interest out of my income and in the RSP. I’ve opened an InterestPlus RSP with PC @ 4.25% for my EF :)

    Q Cash suggests “try to make up about $12,000 K in RRSP and move yourself down a tax bracket. Take the tax savings and put it into a high interest savings account”.

    Question:

    Being that I have a high contribution limit ($48,000) could I do this every year, dropping my tax bracket until my limit is reached? Could I do more than $12k if it brings more of a refund? or am I still limited to the 18%/yr + w/1-time $2,000 overage allowance?

  • Gates VP September 21, 2007, 3:53 pm

    Hey Sean I’ll be the first to answer the $100 question:

    “Being that I have a high contribution limit ($48,000) could I do this every year, dropping my tax bracket until my limit is reached? Could I do more than $12k if it brings more of a refund? or am I still limited to the 18%/yr + w/1-time $2,000 overage allowance?”

    Here’s the deal. Right now, you have 48k in unused RRSP room, that’s been accumulating throughout the years. Every year, you’re allowed to put in 18% (up to 18k) PLUS any unused amounts. So for fiscal year 2007 you’ll be allowed to contribute up to: 9.7k + 48k.

    The way the refund works is as follows: You’re going to make 54k this year and you’re paying taxes on that throughout the year. If you contribute 10k to your RRSP, then the government basically just says “Hey, you just made 44k this year, we’re not taxing you on the retirement monies”.

    Of course, you’ve already paid taxes on that 10k, so the government kindly issues you a refund cheque for all of the “extra” taxes that you paid. They’re also going to ignore any gains that happen inside that RRSP, so you don’t get taxed on it until you pull it back out.

    So if you have some number you can afford to invest (like 1k/month -> 12k/year), then just go ahead, you have tons and tons of room, you’re only eating up 2 or 3 of the 48k.

    However, remember that the refund is based on the amount of taxes you’re paying. Right, they’re giving you back the money you overpaid. But taxes are not flat rate. The last dollars are taxed more than the first dollars (known as tax brackets). Some of your dollars are only taxed at 15% or even 0% (personal amount). So if you put 25k into your RRSPs and your “taxable income” would drop to 29k. Well from 29k to 37k, you only paid ~15% (not 26%) so you’d only get 15% of that 8k returned to you (1200 instead of 2080), so there are some considerations there.

    The other thing of note is to look at non-Registered investments. FT has lots of material about this, but the basic concept is that it’s nice (over the long-term), to have money outside a registered plan. Start small, work your RRSP, do your thing. At some point though, the people who become really wealthy start investing outside their RRSP as well. Don’t worry about it now, but keep it in mind next year when you go back over the numbers.

    PS: I’ve worked over the rent vs. buy calculators with my father and I’ve built out all kinds of spreadsheets and the numbers were pretty much the same over like 25 years. The difference basically came down to 1% here or there and stupid things like a big repair bill or shitty markets at the wrong time. So I just tell people to pick the one they want, as long as they know what they’re getting into.

    FT’s one of the smartest guys I “know” and he has two places, some millionaires still rent. You can win either way.

  • Cannon_fodder September 21, 2007, 6:39 pm

    Would taking out an RRSP loan help improve Sean’s FICO score (assuming that he would be approved for one)? If it isn’t easy to get one now, perhaps in Jan/Feb when the banks are gunning for this kind of business.

    It would be better than having a loan just to improve the FICO score…

  • telly September 21, 2007, 7:03 pm

    Gates, you said, “Some of your dollars are only taxed at 15% or even 0% (personal amount). So if you put 25k into your RRSPs and your “taxable income” would drop to 29k. Well from 29k to 37k, you only paid ~15% (not 26%) so you’d only get 15% of that 8k returned to you (1200 instead of 2080), so there are some considerations there.”

    From Ernst & Young’s calculator (BC), he paid 21.2% from $29k to $39,347, and 24.1% after that (to $37k you used). Those are still pretty good returns I think.

    http://www.ey.com/Global/assets.nsf/Canada/Tax_Rate_Card_BC_2007/$file/17024BritishColumbia.pdf

    The fact that the reader is in BC, in a tax bracket where his dividend dividend tax is only 4.4%, I could see him putting some of his savings in a non-reg. account filled with dividend payers. The RRSP is still a good idea, especially for a home downpayment – even if it is years away.

    Everyone (especially ina hot RE market) thinks everyone owns. Very few people do the math to decide if they are better off buying or renting. We sure didn’t. Don’t be afraid to rent. Some of the most financially savvy people are renters.

  • Gates VP September 24, 2007, 4:16 am

    Hey Telly, you’re right, I just ran the federal numbers, not the provincial ones (notice the CRA link).

    So if Sean is still reading the thread, I’m right and Telly is righter :)

  • Sean September 24, 2007, 10:42 pm

    Hi all,

    Yes! I am still reading and re-reading this thread at least every couple of days ( email notifications are a godsend). whilst meandering through the many other strategies which can be done next year…like credit card arbitrage (that would fit nicely in my PC acct) ;)

    @FB – I read you’re post and thought…yeah, that makes total sense. Then combined with what Telly said after, I’m thinking Why did I bother with this 3k loan when (with paying off regularly) I already have a secured CC that would give me the same outcome? So, I called my other bank (GVC credit union) the next day and I say I want a no fee / rewards card…and will put down $1,500 deposit in a term, they said o.k without a hitch (I’m expecting %1,500 here). Today, I just received the other card with a $7,500 limit. So I call thier CS today to activate the card and asked what the rate was on balance transfers (I read about BT’s here too, links to RFD), they say 5.9% on this card…and I say how long do the cheques take to arrive? They say, if its for an LOC we can deposit into yer bank account..and I’m like, WHA? It will take 5-7 days for the transfer! now I say, GOOD BYE PERSONAL LOAN!…Hellooo 5.1% savings! (Being that I’ve decided to keep things on a 50% track).

    @Gates – I’m almost at a loss for words. You’re response was very informative and a heck of an explanation. It showed me there IS more to look at and think about. The information here is an excellent value to anyone reading this thread. The $100 question, indeed. I found the link before…it just lacked an explanation :)

    @CF – After reading you’re post I called my bank about an RRSP loan to see what they thought. The Mgr said there is no reason they wouldn’t give me one (say as high as $10,000) if I showed that I could pay back at least 50% with my refund…they would carry the rest for the standard 12 months. Which combined with my CC choices will positively affect my FICO while not pushing me over the edge (if I chose that route). Great idea, thank you for the win/win suggestion. I’ve made note and will revisit this in Jan.-Feb./08

    @Gates & Telly, – I think you are both pointing out the same fact (in different ways). Correct me if I’m wrong; though it would seem that if I paid closer attention using a calculator (taxtips.ca or similar), I can figure out at exactly what point the return (refund) would be worth with the extra investment into my RRSP. ie: if I do 9,720 (18%) I get 3,400, at 10,000 I get 3,600 a difference of a couple hundred. Whereas from 12k – 15k there is a 700 difference. combined with the previous 200 or so totals 900 for investing an additional 5,280..which I think is around a 5.8% return on that money in the form of my refund…not even counting the future value. Furthering that even, if I understand correctly…the 15k manuevor would drop me into my next lowest tax bracket and I could continue this (presumably) for the next 9 years, until I hit my $48,000 limit that I have now.

    Did that make sense? or am I looking the wrong way?

    Bottom line; look at what you have to put into you’re RRSP in (we’ll say) January, then calculate whether the % return is worth an extra investment. if so, see if an RRSP loan can be paid off when used as a top-up (an FT recommendation I read). If not, put the extra in a non-reg acct with dividend payers. Though I must say that I am unsure what “dividend payers” actually means…telly?

    @Telly,

    I’m glad you brought up the dividend tax. I was just recently trying to figure out the % rate (based on an elevator conversation no less) and was competely lost. Researching and deciding where I should go with my non-reg savings is going to be a tough hill to climb I’m sure. Where did you get that info from? Thanks for the Ernst & Young link too, nice to have. Will keep that in my favorites and update it annually.

    FYI – In my circle, people say things like, “Sean always has cash” and “You must be on target with you’re salary expectations, I don’t know anyone with 5 $100 bills in thier pocket all the time”.

    My response has always been that “I’m right on target”. This was always said with my own salary in mind. Going forward, I will be posting as “On_Target”, with savings, interest and investment in mind. ;)

  • Telly September 25, 2007, 12:56 pm

    Sean,

    I like E&Y’s tax calculators in general:
    http://www.ey.com/global/content.nsf/Canada/Tax_-_Calculators_-_Overview

    The RRSP savings calculator can give you a good idea of what your return would be like based on how much you contribute (assuming your withholdings are appropriate).

    Personally, I would pay off the personal loan and start making those same payments to your RRSP. I highly suggest the Couch Potato strategy for starters using TD’s efunds since it sounds like you don’t already have an RRSP account set up.
    http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_152254_1452
    It’s what we use for our registered accounts.

    But why wait ’till January to start contributing when you already have cash flow to be used towards savings? You already know you will get a 30.65% return on up to the 1st $16,800 you contribute…so start contributing now! I wouldn’t bother with the RRSP loan – just contribute as much as you can afford out of your cash flow.

    I still wonder if you might be overly concerned about your FICO score. You seem to have good cash flow and low expenses. You don’t need to make any huge changes or take on any debt to both get yourself into the “multi-million dollar march” AND a good credit score imo. Keep it simple! :)

    For now I would recommned RRSP contributions and using your credit card to pay some of your day-to-day expenses and pay it off in full each month.

    I’m no expert of course but so far in my experience (starting rather laste as well), simple is good. :)

  • sam September 25, 2007, 8:59 pm

    regarding TD-e Funds..
    i can see they have 3 funds for US equity..
    TDB 902,TDB 952, TDB 904
    and for International equity they have 2 funds..
    TDB 911 & TD B905

    How do we choose which US & Interantion fund too use.
    Couch potato has recommended TDB 902 & TDB 911 for US & International indices…

    but might they other funds be more appropriate…

    thanks in advance…

  • Telly September 26, 2007, 1:54 pm

    Sam,

    The main difference between these funds is currency hedging. People seem to have differing opinions on hedging. Because I work in the US and live in Canada, I have a 401k account in the US, thus my retirement portfolio contains both USD and CAD.

    FT may have had a post on hedging in the past. If not, it might make a good one…:)

  • GIV May 23, 2008, 1:40 pm

    For me, the maximum mortgage I would ever consider is 2 x gross salary.

    I have that impulse too, but it doesn’t seem possible anymore…

Leave a Comment