Here is a recent article regarding 10 money mistakes to avoid in your 20’s, these mistakes are very prevalent if you are a first time home buyer. From what I see as a mortgage broker working with first time home buyers, more people could benefit from this advice.
Your 20s are filled with milestones and life-changing experiences. It’s a time when the things you learn start to become habits and when financial decisions can either lead you to great success or become a problem for you in the future.
It would be great to have perfect foresight so that you knew the best decision to make in every situation – but in the absence of perfect knowledge, even knowing what not to do in your 20s could help you recognize a bad decision in the making or prevent a bad habit from forming.
If you are in your 20s (or even your 30s), perhaps you can profit from some advice many people in their 40s and 50s wish they’d had as they started out.
Money mistakes to avoid in your 20s
Not contributing to your retirement: One of the most damaging mistakes you can make is not to contribute to your retirement as early as possible. It is easy to think that retirement is too far away and that you should be saving for more immediate goals like getting a car. But you can sock some savings away in a RRSP even if you earn minimum wage while in graduate school. At the very least, start saving for retirement when you land your first job. Keep in mind, your RRSP can also be used for a down payment up to $25,000. The end result:If you don’t have the discipline to save for retirement in your 20s, you may end up spending your entire salary and not saving for a car or anything else either. This is a difficult mistake to recover from that could cost you as much as $100,000 or more in the long run.
Buying more car than you can afford: New car manufacturers would like you to believe you won’t be complete without their latest model, but that new-car smell can easily run you $20- to $50,000 in some cases. In reality, you may not need a car in some locations; but even if you can’t use public transportation, it isn’t necessary to buy more car than you can afford in any event.
The end result: New cars depreciate in value quite rapidly the first year and yet you will pay thousands more than the sticker price when you include higher insurance premiums and the interest to be paid on a five-year loan for a new car. In most cases, it is best to buy the right car for your wallet and to drive it into the ground.
Not starting an emergency fund: Frequently, people find excuses why they don’t put an emergency fund together, such as, this money could be used to pay bills or to start contributing to their retirement. But it should be the first thing you do after meeting your basic needs. It is a good idea to keep at least $1,000 in a savings account or a Tax Free Savings account at all times for life’s little emergencies. The end result: If you don’t start an emergency fund, you are more likely to accumulate debt.
Living on credit cards: Be grateful if you have not gotten deep into debt in your 20s, and avoid it like the plague. Living high on your credit cards is a dangerous game to play with your finances. At some point you have to pay for your purchases, and that usually means emptying any savings you have accumulated. If you have already depleted your savings (or never established any), you may start the cycle of missing payments and opening new credit card accounts. The end result:Living on your credit cards will teach you to live paycheck to paycheck, which is a very difficult habit to break once established. Left unchecked, this practice will ultimately destroy your credit score as well.
Failing to set financial goals: If you never stop to think about what you would like to accomplish in five or 10 years, it is likely that you won’t accomplish anything by the end of that period. On the other hand, the very act of identifying and setting financial goals for yourself in your 20s clarifies your choices and helps you naturally focus on ways to reach your goals. The end result:Failing to set financial goals in your 20s can create tension later on as you realize that you have to work harder to make any sort of progress toward what you want in life.
Keeping up with the Joneses (especially if they are your parents): The pressure to fit in can be the subconscious motivation behind a lot of poor financial decisions, but the tragedy of this unproductive mindset is that you can always find someone who has more than you do. Sometimes that pressure can mount even by comparing your lifestyle to your parents’ lifestyle and thinking that you can have everything they do all at once. The end result:If you don’t realize the logic that your parents (and others) have had many years to accumulate their wealth, you could set unrealistic goals for yourself, which could lead to making risky financial decisions.
Not starting the habit of paying yourself first: Even if you are well paid in your career, it is a mistake not to pay yourself first. Saving a certain amount of money before you pay any bills encourages better financial habits like budgeting. By paying yourself first, you effectively prioritize saving money and that is how you begin to build wealth. The end result:People that don’t learn to save first usually spend all their money paying bills and having fun. In the end, they find there is nothing left to save.
Taking on student loans without learning about career prospects: Following your passion doesn’t always pay, so treat your college education as an investment that can help you build the life you want. If you don’t investigate whether your potential career is slated for fast growth and expected to have strong salary in the future, you may have a more difficult time paying back student loan debt. The end result: Student loans are a very tenacious form of debt. Even if you don’t finish your degree, in most cases you must still repay your student loans – and it could take years if you can’t find a good-paying job.
Going into debt for a wedding: You want your wedding memories to last a lifetime, but you don’t want debt from your wedding to last that long – or at all! Weddings can become expensive events, especially if you make no attempt to manage costs. But you don’t have to incur debt in order to have a memorable wedding – you can save up for it instead. Besides, an expensive wedding doesn’t equate to a successful marriage. The end result: Starting married life while managing to pay off debt is a sure way to add stress to your relationship, the kind of stress that many cite as the reason they got divorced.
Trusting others to take care of your finances: If you weren’t taught a lot about managing your money, now is the time to learn because, as J.D. Roth is fond of saying, “No one cares more about your money than you do.” Recognize that the advice others give you (or the products and services they sell) are almost always designed to promote their best interests, not necessarily yours. It is up to you to dig deeper and do your own research to protect yourself. The end result: Blindly trusting others to take care of your finances is a sure way to fall victim to a scam or to lose money on an investment because an advisor seems more knowledgeable than you.
The best thing about being in your 20s is that time is on your side. You can recover from money mistakes more easily and enjoy a bright future; but making good financial decisions starts with learning about money and being willing to take responsibility for your own financial success.
(NC) Interest rates may be low but it’s not advisable to take on more debt, say advisors in this field. The federal government is telling us to get prepared for interest rates to rise again – and that will add extra financial burdens to the household.
For example, on a mortgage of $277,658 with a 3.1% variable interest rate, an increase of 0.5% will increase mortgage payments by $864 per year. If rates go up 1%, that will add $1,740 per year to the payments without paying down any more of the principal.
Working toward clear financials goals and paying down debt now are two ways you can protect yourself against the eventual increase in interest rates. The Financial Consumer Agency of Canada offers a number of tools to help you plan, manage, and reduce your debt at
www.it pays to know.gc.ca. Here are some examples:The Financial Goal Calculator helps you to create a realistic plan to get out of debt, save for retirement, save money for an emergency fund, and more. With the Mortgage Qualifier and Calculator tools, you enter information about the cost of the property you want and the money you have. The tools will show you whether you qualify for a mortgage and will determine your payments.
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An economist at Canada’s biggest bank says home prices could start falling in 2016 if interest rates return to more normal levels. And he warned that, in the meantime, what goes up will likely come down if salaries and incomes don’t keep pace.
“The higher home prices get relative to income by the time rising interest rates really start to bite, the more prices will have to adjust (downwardly) over time to keep longer-term affordability from reaching intolerable levels,” Royal Bank of Canada economist Robert Hogue wrote in a research note Wednesday. “This means that any price increases exceeding the rate of household income gains in the near term (2014 and 2015) likely would result in steeper price declines down the road.”
Mr. Hogue is now expecting sales to tick down by almost 1 per cent next year, and home prices to rise by just 1.1 per cent (he is expecting prices to rise 4.3 per cent this year). That’s actually a stronger forecast than he released just two months ago, because low mortgage rates have been giving the housing market more fuel than expected. He’s now cautioning that too much momentum could be a bad thing for the market long term.
He believes that the current low level of interest rates is not sustainable, and that longer-term rates could rise meaningfully by late 2015 (RBC expects five-year Government of Canada bond yields to more than double to 3.30 per cent by the end of 2015. Five-year fixed mortgage rates tend to move in step with five-year government bond yields).
Rising interest rates will erode housing affordability, which Mr. Hogue notes is already stretched in some markets. “We expect the current upward momentum in home prices to wane gradually, as demand cools and more home sellers emerge,” he wrote. “We expect that the current condo construction boom in large urban centres will bring more properties on the resale market as units are completed. While the majority of condo units under construction are already sold, rapid increase in the stock of existing condos is likely to create a displacement effect whereby older units are vacated in favour of newer ones.”
Looking across the country, he expects a decline in the number of homes sold next year everywhere except in Atlantic Canada and Alberta. “High-priced British Columbia (mainly Vancouver) and Ontario (mainly Toronto) markets are projected to see the bigger drops (2.3 and 1.3 per cent, respectively), reflecting a more extensive erosion of affordability,” he wrote. “We forecast the resale declines in the other provinces to be modest to marginal.”
As for prices, he is forecasting a significant slowdown in the rate of growth next year everywhere except across Atlantic Canada, with Quebec likely to see a small decline in prices.
“Prices in B.C. and Ontario are forecasted to show greater moderation since this is where these negative pressures will be more intense,” he wrote. “Alberta remains at the top of our rankings for next year thanks to its strong economy and in-migration keeping the demand-supply equation still somewhat tight. We expect prices in Atlantic Canada to continue to track a slight upward trajectory.”
Paying down your mortgage faster. It’s one of those boilerplate suggestions that financial advisers love to make to their clients. After all, throwing extra money at the biggest debt most Canadians have can result in big interest savings and being mortgage-free years sooner.
So why isn’t everyone doing that?
According to a spring analysis by the chief economist at the Canadian Association of Accredited Mortgage Professionals, only 35 per cent of Canadians with mortgages took some kind of action in the past year to speed up the date of their “burn the mortgage” party. That suggests that almost two-thirds of those mortgage holders paid off their mortgages as the contract dictated, at least over the previous year.
A recent survey (carried out on May 21-22) commissioned by CIBC and carried out by Angus Reid found that only 55 per cent of 1,509 online respondents with m ortgages had taken some kind of action to repay their mortgages faster since they’d originally bought their homes.
Since mortgage payments are made with after-tax dollars, putting extra money down on a debt with an interest rate of 3.49% is equivalent to getting a guaranteed, risk-free return of over five per cent for most taxpayers. If your mortgage rate is higher, your return would be higher too.
So why the seeming reluctance by many to do this?
Mortgage experts say personal circumstances are often at the top of the “why not” list.
“Young families or first-time buyers are in an expensive period of life and are unlikely to have much free cash to put towards their mortgage,” points out Jason Scott, a mortgage associate with TMG The Mortgage Group in Edmonton and author of Approved! Mortgage Advice for all Stages of Life.
Others, he says, may be sensibly tackling other debts first. “If they have more expensive debt, like credit cards, it’s better if they pay off the more expensive debt first,” Scott told CBC News.
Industry players say it’s also true that, in these days of lower mortgage rates, it may be a tougher sell to persuade consumers that it’s worth tackling mortgage debt at all.
You also won’t have to dig too deeply to find people who tell you that, regardless of today’s lower rates, they just don’t have the extra money to tackle their mortgage debt.
I owe, I owe…
After all, we’re repeatedly told we’re in hock up to our eyeballs. We’ve all seen the comments tut-tutting Canadians about their debt levels.
The governor of the Bank of Canada scolds us. Bankers, regulators and politicians wag their fingers in warning. We’ll be sorry, they say, when interest rates go up if we still have these big debts.
The debt stats do seem daunting: The level of household debt relative to disposable income was a near record 163.2 per cent in the first quarter of this year, Statistics Canada says. That means Canadians owe just over $1.63 for every $1 in disposable income they earn in a year.
That can make it tough to whittle away at the $1.1 trillion (that’s trillion, with a “t”), that we owe on our mortgages, especially when we have another $507 billion in higher-interest consumer credit debt on top of those mortgages.
Viewed against this backdrop, it may then be somewhat of a minor miracle that, in the midst of such a supposedly bleak financial landscape and the competing demands for our extra money (like saving for retirement and the kids’ education), many Canadians are actually taking steps to pay down their mortgage debt faster than their mortgage contracts dictate.
And make no mistake. Paying off your mortgage faster can pay big dividends.
How much money can you save? It depends on which strategy you use.
Here are four that can put a surprising amount of extra money in your pocket over time:
Strategy 1: Increase the amount of your payments
Throwing just $100 a month extra at your mortgage can result in formidable savings. Let’s assume a $250,000 mortgage at 3.49%, amortized over 25 years. Monthly payments would be $1,247.
Boost that payment by $100 to $1,347, and something magical happens. You’d save $15,400 in interest charges over the life of the mortgage (assuming a constant interest rate of 3.49%) and you’d pay it off three years sooner.
Strategy 2: When you renew, keep your monthly payments the same
Let’s assume you took out a $250,000, five-year fixed mortgage in 2009 at an interest rate of 5%. Your monthly payments have been $1,454. Now, it’s time to renew and your bank is offering you 2.99% for the next five years. As a result, your monthly payments would drop to $1,224.
Great! But what if you keep on with the $1,454 payments you’re used to? That extra $230 a month over the remaining life of the mortgage will allow you to pay off your mortgage four years sooner and you’ll save $15,700 in interest. Not bad for just maintaining the status quo.
Strategy 3: Choose an accelerated payment option
This is almost painless. Let’s use the example of the $250,000 mortgage described in strategy one. Your monthly mortgage payment is $1,247. Divide that by two, and you get $623.50. Now arrange to pay this amount every two weeks. Because a pay-every-two-weeks strategy results in 26 payments of a half-month’s mortgage payment, you end up paying the equivalent of 13 monthly payments a year – or an extra monthly payment every year.
This is what’s known as an accelerated bi-weekly payment. Don’t just opt for bi-weekly – you want the method that forces you to pay the equivalent of an extra monthly payment each year.
This strategy alone would save the borrower more than $16,300 in interest over the 25-year life of the mortgage. And that 25-year mortgage would also be paid off in a little more than 22 years.
Strategy 4: Make a lump-sum payment
Most closed mortgages (but not all) allow borrowers to pay off up to 10%, 15% or 20% of the original principal in each calendar year without penalty.
Thanks for nothing, you say. “I don’t have $50,000 to throw at my mortgage.” The good news is that you don’t need to pay down the entire 20 per cent. Throwing even a few hundred dollars at it here and there can make a big difference.
One popular suggestion is to put your tax refund to work this way. Assuming we have the $250,000 mortgage described in strategy one, and applying a $1,600 annual payment that the Canada Revenue Agency says is the size of the average refund, that manoeuvre alone would see that mortgage paid off three and a half years early and the mortgage holder would save $20,000 in interest.
Combining two or more of these strategies would result in even bigger savings.
Fortunately, it’s easy to virtually play around with various payment scenarios. Most financial institutions, banks, and mortgage brokers have online mortgage calculators that can spit out the savings for you.
Here is a link to my favorite calculator, it’s simple easy to use format allows you to calculate different variables, complete with amortization schedule
This is a republication of a good article on the issue of debt.
Lee Anne Davies has published a book with bankruptcy expert Blair Mantin. Add When Life Bites You in the Wallet to your summer reading list.
I’ve been an admirer of Lee Anne Davies for a number of years. We first met more than a decade ago when she was with the Canadian Securities Institute. She moved to RBC next, where she did work in the retirement planning business that included valuable consumer research. Since then, Davies has earned a PhD in aging, health and wellbeing and has set up her own firm, Agenomics. You’ve read about her in this space before (A very different take on Unretirement).
Davies’ new book — coauthored with bankruptcy trustee Blair Mantin — is perfectly timed. When Life Bites You in the Wallet focuses largely on debt management. There’s more to it than that (it features a useful section on financial responsibility, for example). But what impresses me most is the team’s advice on how to think about credit and how to stay in control of it. It’s what sets this book apart from others in the same category.
Davies and I spoke last week about the do’s and don’ts of debt.
Don’t cosign that loan. Not even for your kids. Two reasons, according to Davies. First, it limits your access to credit. Second, you’re letting your friend/child off the hook. “Why aren’t you helping them create the habit of saving money? To learn how to earn the credit? To be responsible and maintain credit worthiness,” said Davies. Enough with the helicopter parenting already.
Do make choices about who you spend your time with. We’re wired to socialize, which often means going along with a group on spending decisions. There’s nothing wrong with that, if your spending habits (and probably incomes) are in sync. But understand that groups can provide both positive and negative reinforcement. “You’ve got to be so careful about who you’re hanging around with,” said Davies. “Keeping up with the Joneses is not a competitive thing. You don’t even realize that it’s happening.”
Don’t get used to luxury. Salaries go up and down over the course of a career. Sometimes, people get into trouble when they make lifestyle adjustments that they can’t maintain long-term. “I’ve never really had a fancy car,” Davies told me. “I don’t want one because if I did, I’d never want to get rid of it.”
Do give yourself financial flexibility. Davies is not anti-debt. The key, in her opinion, is that you have sufficient wiggle room to deal with whatever surprises life has in store for you. There’s nothing wrong with a line of credit, as long as you don’t overextend yourself.
Don’t make yourself house poor. “There’s no reason to put all of your money into a single asset,” said Davies. “In the long run, even if it does pay off financially, the balance in life has been lost.” The debate about good debt (incurred to purchase something that gains value over time, like a home or an education) vs. bad debt (incurred to purchase something that loses value over time, like a car, furniture, etc.) is beside the point if you’ve taken on so much debt that you can’t sleep at night.
Do save for retirement at the same time you’re paying down debt. “You need to put something away for retirement every single year because of the opportunity for growth over time,” said Davies. Don’t base decisions to pay down debt or save for the future based on interest rate forecasts. Do both. “That retirement nest egg growth will amaze you,” she said. “Put it aside, invest it prudently and let it grow.”
(NC) Buying a house is one of the biggest investments of our lifetime – and it’s a journey that is usually filled with questions around affordability, impact on savings, and lifestyle changes.
There are a number of online calculators and tools that can help answer many of these questions and give you a good sense of how much ‘house’ you can afford and what your monthly mortgage payments will look like. Take a look at these three tips for first-time homebuyers, courtesy of the mortgage specialists at RBC:
Know how much you can afford – beyond the mortgage amount, don’t forget to consider ongoing home ownership costs and your lifestyle needs. Use the How much home can I afford calculator available at www.rbcadvicecentre.com to find out where you stand.
Get a pre-approved mortgage – shop for a home with confidence and let everyone know you are a serious buyer. Additional benefits for pre-approval include being able to put in your offer faster, and potentially beating out another prospective buyer who hasn’t done their homework.
Know your mortgage options – take advantage of flexible pre-payment privileges to cut years off your mortgage. There is always more to your mortgage than the interest rate, so be sure you know what options are available in each mortgage type, and how they can be used to save you money. Use online tools and calculators to test out different scenarios.
BALANCED MARKET CONDITIONS CONTINUE IN MARCH – New MLS® Listings Up 15%; Active Inventory Rises 23%
April 9, 2014 For Immediate Release
BALANCED MARKET CONDITIONS CONTINUE IN MARCH
– – – New MLS® Listings Up 15%; Active Inventory Rises 23%
Winnipeg – 2014 is showing continued improvement in MLS® listings and overall inventory. Both new listings in March and active listings or overall inventory at the end of the month were well up over last year. Buyers have far more to choose from when you look at all residential property types. Going into April last year there were over 2,000 residential listings whereas now there are in excess of 2,500. Condominiums show the largest increase with 562 available for sale this year compared to 346 in 2013. The only residential property types down from last year are duplexes and resort properties.
MLS® sales for March rebounded from a poor March 2013 with year-to-date sales slightly ahead of last year for the first three months. If you compare them to the 10-year average sales performance they are off 3 and 7% respectively. However we must keep in mind Winnipeg endured it coldest winter since 1898.
March MLS® unit sales were up 9% (919/844) while dollar volume increased 11% ($249.1 million/$224.7 million) in comparison to the same month last year. Year-to-date MLS® unit sales are up less than 1% ( 2,164/2,156) while dollar volume has risen 4% ($570.9 million/$550.4 million) in comparison to the same period in 2013.
A sign of home buyers seeking more affordable options in March was readily apparent from single –attached unit sales rising 45% and condominiums up 17%. Residential-detached or single family home sales increased 10%.
While WinnipegREALTORS® MLS® market is becoming more balanced than in previous years March still saw over one in three homes sell for above list price. Less than one in five condominiums sold for above list price with nearly 25% getting full list price.
Speaking of prices, March saw average home sale prices nudge up to just under $300,000 for both above and at list price sales while those selling for under list price still achieved $295,000. As for areas of Winnipeg, the southwest quadrant had an average home sale price of $390,000 while southeast Winnipeg was second highest at $325,000. The lowest average home sale price in the city was the northwest quadrant at $235,000. The average rural home sale price was $290,000.
“We are in a real favourable position going into April to take advantage of better weather, low unemployment, very competitive mortgage rates, and the best inventory we have seen in many years,” said David Powell, president of WinnipegREALTORS®. “One of the benefits increased condominium supply brings is it will encourage a growing empty nester demographic to look at selling their existing single family home and as a result create more choice for families seeking a desirable home.”
The most active residential-detached price range was the $250,000 to $299,999 price range with 23% of total sales. Next busiest was the $300,000 to $349,999 price range at 15%. Close behind was the $200,000 to $249,999 price range at 14%. The highest home sale price was $1,035,000 while the lowest went for just $18,000. For condominiums, the most active price range was from $150,000 to $199,999 at 28%. There were another 21% of sales from $200,000 to $249,999 and 15% more sales from $250,000 to $299,999.
The average days on market for residential-detached property sales in March was 28 days, 4 days faster than last month and the same pace as March 2013. Average days on market for condominium sales was 32 days, 12 days quicker than last month and 5 days off the pace set in March 2013.
Established in 1903, WinnipegREALTORS® is a professional association representing over 1,800 real estate brokers, salespeople, appraisers, and financial members active in the Greater Winnipeg Area real estate market. Its REALTOR® members adhere to a strict code of ethics and share a state-of-the-art Multiple Listing Service® (MLS®) designed exclusively for REALTORS®. WinnipegREALTORS® serves its members by promoting the benefits of an organized real estate profession. REALTOR®, MLS® and Multiple Listing Service® are trademarks owned and controlled by The Canadian Real Estate Association and are used under license.