the darkerside to rants

I am sure I am not the only one who, when looking at all the bank accounts and assets finds himself not being where they really want to be.

So, the only plan I have made to 2011 is to get where I want to be (and a few smaller things on the side as well, but this is the biggie).

In order to get there a plan was needed and here I am giving you an insight on how I plan on accomplishing this, maybe it will be useful to you as well.

1. Understand the Problem

Everything starts with an analysis. In this case you want to know where it is you actually spend the money.

For this I kept a log for a month, writing out any expenses that I have, so that included Rent (or Mortgage), Internet etc. all the fix costs are added up, then looked at. I found little I could cut, mainly because I already stripped my budget a few months ago.

I then looked at all the other expenses I had, that included food etc. But I was more interested in variable spending, that is, stuff I spent money on that wasn’t really all that useful. Seeing how much, for example, I had spent every month on eating out was a bit of an eye opener (though this is something I had already done earlier in the year as well and pared back accordingly).

Lastly, I set up a spreadsheet. In this spreadsheet I listed every single debt that I had. I brought out the whole amount, how much I paid off that month, and most importantly, how much I paid that month on interest.

So, any CC, Mortgage, LOC etc. that you have goes into this spreadsheet.

It tallies up the totals, how much outstanding debt (too much), how much I pay in interest every month (way too much) and then I added up how much I had paid off this month (not enough).

The reason for this is to show just how expensive debt is. I realized that over the last few months that only half of my payments went to serve the outstanding debt, the rest was interest payments. This number will go down as time progresses (and this part of the idea of keeping the spreadsheet) but for now it is a reminder just how stupid one can be by taking out a loan.

Also: Add up the amount of interest you pay and just imagine what you could be doing with all that money. Once the debt is gone, you will be able to use that money (interest alone!) to do nice things.

Motivated yet?

2. Make a Budget

Now that we have all of this sorted out and know how bad (or not so bad) we are off it’s time to make a budget and a plan.

The budget is rather easy, you take your fixed expenses, those you will not be able to par down much I would presume, though if you can, cut it down. Do you really still need Cable TV? I didn’t so it went out the window.

Make a budget for food, and also important, give yourself an entertainment budget. If you par it all down the odds are you will still be spending and then just be mad at yourself, plus, if you give yourself a budget and come in under you’re better of.

So my budget for entertainment beginning January is going to be $100 a mont. This does not include food, but it does include eating out.

Pay Cash

This is a biggie, and I am not the only one who had this idea: Stop paying with your Bank card or Credit Card. Why? Because it makes money less real. It’s just a number. Although you may see on your spreadsheet what you have just spent money, the reality is that it won’t sink in until later.

As such: give yourself a weekly money budget to spend, then carry this around as cash. Leave your CC and Bank Card at home and only take it with you when you know you need it (e.g. if you have to pay for a large item). Other than that, keep them in a drawer, the less temptation, the better.

Make a shopping list

If you sit down at home first, then write a list out of the things that you need you’re less likely to stray from it, this is also a cost control measure as you’re less likely to give in to impulse buys.

Make a payback plan

This is another biggie. I get paid once a month. The temptation is there to just make your debt payments right then and there. But, psychology, if you pay back more than once a month (say, every two weeks), you get a “benefit” out of it. you will see how your outstanding balance goes down twice and this is a very rewarding feeling.

I did put the spreadsheets etc. in place as of December, so I already had a “test run” and I can tell you to make the payment and then updating the spreadsheet is deeply satisfying. Pay back early, pay back often, see how you’re doing better.

Be Tax Smart

Oh, I am guilty of this. I never really bothered with writing stuff off. I spent the last month looking at all the things I could have written off but never did. Obviously you don’t want to do that yourself, you want to find yourself an accountant that can do the tax return for you. But in order to make this fast and less painful make sure you sort your invoices etc. I admit, I was very very bad at this too. I spent the last two months going through my “filing box” and shredded and filed a lot of paper. It was annoying and boring, there is a reason why I am not a bookkeeper or accountant, but if you want to take control of your finances you need to know where you are.

See the money you’re getting back from your tax return as a good way to pay back your debt even faster.

A good example of this is the MSP here in BC. I pay this myself and it is $57/month, which means I pay $684/year on the MSP. Rule of thumb is you get around 30% back on your tax return, so $205 just on that. Nice.

Likewise other things can be written off, get an accountant, talk with her or him and see what else you can write off.

This also means to try and max out any (income) tax shelter you may have, that is for example the RRSP here in Canada that you could and should max out if you can.

Savings

I admit it, I have a very very serious plan to be debt free, as such I have delayed / ignored any logic that would dictate to put money away. As I am single the risk is pretty slim but if you have family it may be a good idea to not be as aggressive on the payback as I am. For example, take your tax return and put it in a savings account, a Tax Free Savings account is a good idea (I will write about this a bit more in the next few days, but for now see it as this: As you already paid income tax on it, any profit you make in that account is yours to keep. While taking money out of the RRSP will incur income taxes (it is only deferred) anything you take out of the TFSA does not. So for a “rainy day” fund this is the better option.

Be aware though that there is a contribution limit of currently $5000/year, so you cannot save more than that in it, if you have more than a normal savings account will do as well.

Be Honest

This is the most important thing. Be honest to yourself about your financial situation. How much you own, how much you pay in interest and how long it would take you to pay it off at your current rate.

If you want to finance something new, calculate how much it is REALLY going to cost you, that is: How much will you pay on this item REALLY when you factor in all the interest you’re going to pay on it. This also leads into my final point:

Wants and Needs

This is probably the biggest. Advertising and peer pressure has turned many wants into needs. Learn the difference.

Crude example:

I NEED to eat and cloth and have Shelter.
I WANT that new iPhone / Computer / Game.

So, everything you currently spend money on is something you should examine based on this. Do you really need it? Or do you just want it? I mentioned above to make more than one debt repayment a month, the rational feeds straight into this. Reducing your debt has become a need, buying new stuff has become a want.

There is enough research that shows that if we go out and buy something we do get a “reward” in the brain, so a lot of the spending we are doing is based around this. Making these repayments is a way of getting the reward without causing any additional cost.

If you want, make debt payment every week, even if it is smaller amounts you pay back every time you will get the gratification of “buying” something and thus are less tempted to pay for other things that only get you deeper into debt.

Plan for the Future

Okay, it may take you a year or two to dig yourself out of that financial hole you’re in, but that should not prevent you from making plans for the future. This includes investments.

Do you have a pension at your job? If so, will it pay enough for you to live on? Where are your assets? (Note: If you have a Mortgage, you don’t own the house, so don’t count it as an asset it’s a liability until paid off, and even once it’s paid of you still have taxes and repairs to consider).

On how much could you survive? The rule of thumb is you should be paying no more than 1/3 of your income for shelter, how much will your house cost you once you’ve paid it off (taxes, repairs, utilities etc.). You get the idea.

Find yourself a good financial advisor once you’re done. Keep in mind: Diversification is the name of the game, don’t keep everything in one asset otherwise you’re badly exposed (this is also were the TFSA can come in).

Lastly a disclaimer: I am not a Financial Advisor, nor a Financial Professional. I have done a lot of reading about this over the last few years though and so far this plan works for me. I am also a single guy, I have no dependents and the only one I need to take into consideration when I make any financial decisions and the effects they have is me

Lastly, my longterm goal (two years out) is a simple one: I only want to need to have to work for six months out of the year, this does and has made an impact on how I live my life, but I am much more relaxed about this.

Life of course is unpredictable, so who knows what happens in the next twelve months, but the goal is that by the end of 2011 I will be in the situation that I am at the point where I only need to work nine months in 2012 if I so chose.

Your Turn.

Human being are well known for their gift of self delusion. Be it that the “love of our life” can do no wrong until they finally can and we realize just how badly mistaken we were. I am pretty sure there are very few people out there in this world who did not fall into this trap.

Or the delusion that we need to do something out of reason X, where said reason is purely made up in our mind to justify our choice.

The list of course could go on and I am sure if you think for ten minutes about your life you will find a handful of examples as well.

While all of this can be emotionally tragic or have tragic realities on a personal level over the last 30 or so years we have witness a much bigger delusion with much more risk to all of us.

Take this headline for example:

Canadians’ net worth grows

Soaring household debt dampens effect

Now this reads good, doesn’t it? We’re all better now, and wasn’t it just a hard time this 2008 / early 2009? But now it’s all better according to this headline, even though the subheadline tries to dampen the mood a bit.

But is this really the case? Are we really better off now? The articles has this little nugget in it:

The bank’s economists looked at another measure of debt, the ratio of assets to liabilities. Before the recession, households held from $5.6 to 5.8 worth of assets, for every $1 of debt. Currently, households are holding a record low $5.1 of assets for every $1 of debt.

Ah, now here’s the rub. The problem is that the net worth is wishful thinking only, you know, like the guy or gal you had a crush on high school from afar until they opened their mouth and you realized that they had the voice of a chipmunk. The problem with this whole headline and statement is simple: This isn’t real money.

Let me try to explain.

The way the networth is calculated is: Your Liabilities (e.g. your mortgage) vs. your assets (e.g. your paid off car). Well, that’s how it should be done. The problem is that they do not do this. They actually take the price they think your house will fetch on the market and count it as an asset. So they deduct the perceived house value from your mortgage and give you the difference as an “asset”.

That’s just delusional.

Think about it. They take a value that only exists on paper and has no real world application and make it out to be real so that you can feel better about the hundreds of thousands that you own to the banks. The problem with these house prices is that they aren’t set in stone. Sure, the papers were rife earlier this year and late last year of people getting into a bidding frenzy and paying more money than asked, but this can also go the other way if you suddenly have nobody able to afford / wanting to buy property, it always cuts both ways. Hence why you shouldn’t count your chickens until all the eggs have hatched.

Furthermore, the one thing they do not take into account in this calculation is interest.

When you go and get a mortgage in order to finance the purchase of a property (let’s be clear, getting a mortgage is not buying a house, it is getting a loan) you not only pay the principal (the sum you borrowed) but also the interest on it. In most cases (current artificially low interest rates ignored) this amounts to almost doubling the purchase price over the course of the average loan (of course if you pay it off faster you pay less interest and you’re better off. But people who could do this would not go for a 0/40 or 5/35 mortgage, and even at just 25 years you still pay a hefty sum in interest).

What this means though is that you are probably in negative equity, meaning you actually lost money on that “investment”.

And yet, if you talk to your bank they will continue to tell you that you are actually building equity on your house, they will look at your credit rating and tell you that you are actually doing well etc. It is smoke and mirrors, not to outright say you are delusional and the bank is doing it’s best to keep you that way.

Here’s another example from a message board:

Who cares if prices come down 20% when they already went up 30%?

Someone who can do a bit of math?

Say, you have $100 and magically they become 30% more (== $130), then drop by 20% (130 x 0.8) you are left with $104 or just a 4% increase (which will be eaten up by associated costs like closing costs, interests paid, repairs, taxes etc.).

Meanwhile, presume you only started out with $70, they then increased in value again by 30%, you now have $91, now it loses it’s value by 20% and you’re left with $72.8, or again 4% in “profit”.

The reason I point this out is because it exemplifies the utter lack people seem to have when it comes to finances and money and just how delusional we as a society have become.

The reason why this is all not so good for all of us is simple and answered in the CBC article from above as well:

TD said liabilities increased four percentage points faster than income last year and interest payments remain high, despite low interest rates.

You may want to chew on that for a bit and come to your own conclusion what this means for Canadian networth.

And by the way, this isn’t the only place where things like this are happening, it seems to be a global phenomenon and not only limited to the world of finances and real estate. Remember the whole “We’re going to use Ethanol in order to remove ourselves from the need of oil”? Yeah, similar scam, they conveniently forgot to mention that most of the corn is grown using fossil fuels, that the refinery / distillery is run on fossil fuel etc. But in the end it made people feel good at the pump, because it was ethanol, plant based, renewable and so much less CO2, fill her up.

Welcome to the age of global delusion, anybody want to guess how the crash landing will look like?

GM is bankrupt

So it is done. GM, General Motors, the American heart is no more. Today GM filed for bankruptcy, something they should have done nine months ago if not longer.

Depending on who you talk to people have different opinions of why GM failed.

Michael Moore:

It refused to build automobiles that the public wanted, cars that got great gas mileage, were as safe as they could be, and were exceedingly comfortable to drive. Oh — and that wouldn’t start falling apart after two years. GM stubbornly fought environmental and safety regulations. Its executives arrogantly ignored the “inferior” Japanese and German cars, cars which would become the gold standard for automobile buyers. And it was hell-bent on punishing its unionized workforce, lopping off thousands of workers for no good reason other than to “improve” the short-term bottom line of the corporation.

New York Times:

In its bankruptcy petition, G.M. said it had $82.3 billion in assets and $172.8 billion in debts. Its largest creditors were the Wilmington Trust Company, representing a group of bondholders holding $22.8 billion in debts, and affiliates of the United Auto Workers union, representing nearly $20.6 billion in employee obligations. In a court affidavit, Fritz Henderson, G.M.’s chief executive, said that bankruptcy and a Treasury-sponsored sale of General Motors’ assets to a so-called “New G.M.” were the automaker’s only option to move forward. Failing that, he said, the company faced liquidation. “There is no other sale, or even other potential purchasers, present or on the horizon,” Mr. Henderson said.

Of course there is the usual scapegoat, the Union. This is not necessary something that was said out loud in the media, though politics as well as the news media never tired to say how much the Union needs to make “concessions”. This all harks back to the “Golden Days” of GM and the Big Three. Of course a bit of envy by the average Joe who spent thousands to get a degree why a guy who had a high school diploma got excellent benefits etc. for putting tyres on cars.

But the reality is probably something rather simple: The North American consumer.

There is no desire by the average consumer to drive a small car when they can get a big one. That is unless they get forced into it by high gas prices. This is where GM failed the most, they sold lots of cars for a long time and management clearly did screw up along the way with horrible cars and a God like attitude thinking it would all be fine.

Everybody is to blame in the fail of GM, but in the end GM is just a reflection of North American society as a whole, the seeking of the quick buck, the idea of entitlement when it comes to ones own possessions all contributed to it.

Maybe the people who considered a failure of GM the failure of (North) American society right. What will be left after it is said and done? The official line is that GM will rise from bankruptcy as a new company and will make cars and come back to glory; as will Chrysler apparently.

But I doubt it. I think the days of GM and Chrysler are done. The reason for a “structured insolvency” is simple: A complete failure would reflect badly on the politicians and the country as a whole. GM, although probably no longer the heart of America it still has an iconic status. I predict that in a year from now what is left of GM and Chrysler will be quietly brushed under the carpet in the hope that nobody will notice.

Oh, and watch the DOW next week, both Citi Group and GM are going to be taken out of the index and will be replaced with Cisco, I expect the DOW will see a rise next week, but don’t be fooled.

… The Economist puts a picture like this:

as it’s “teaser” for an article on the world economy.

But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.

[...]

Add all this up and the case for optimism fades quickly. The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

This, after all is coming from “The Economist” a bastion of gung-ho economic news and a publication that not two years ago was harping on about the virtues of globalization, free capital flow etc. etc.

It is, somewhat amusing and scary at the same time to realize that the reality is starting to sink in with the “opinion makers” at places like The Economist. Will it change the outcome? No, I don’t think we have gotten even close to the truth in the media, as long as I hear people tell me that “If the media would just stop reporting the bad news all would be fine” we haven’t arrived…. And denial is still running strong and I can’t blame them really; if everything you’ve believed in so far is on the verge of going away / being wrong; then I’d cling to any little glimmer of hope as well, even if it means false hope.

After all, hope dies last.

Why ‘Fallout’ for the financial crisis? from Marketplace on Vimeo.

Margin calls and the financial market’s decline from Marketplace on Vimeo.

Over-the-counter, over the top from Marketplace on Vimeo.

How credit cards become asset-backed bonds from Marketplace on Vimeo.

So, let’s take a subdivision home in a western suburb of Toronto built three years ago, sitting on a 36-foot-wide lot with a double car garage, and currently on the market for $460,000. You can rent that three-bedroom home today (or a mess of others just like it) for $1,800 a month.

So, that’s a yearly rental income of $21,600, divided into an asking price of $460,000, for a P/R ratio of 21.2. Ouch! This baby is overpriced, especially so because comparable houses can be leased for up to $300 a month less in the same general area.

So, let’s ask a final question: Is it better financially (i.e. cheaper) to buy or to rent this particular house?

Well, let’s do the math on 20% down (that’s $92,000) and a mortgage of $368,000, plus maintenance costs, insurance and property taxes (charges not incurred by a tenant).

Downpayment cost (what $92,000 a year would earn in a 3% GIC): $2,760

Mortgage payments ($368,000 at 5-yr rate of 7.2%, 25-year am): $31,477

Maintenance (new house, virtually nothing): $1,000

Insurance: $1,700

Property tax (in this area, average on 3-bedroom, 2,000 sq ft home): $5,400

Total annual ownership cost: $42,377

Rental cost for the same house: $21,600

Cost of being a Greater Fool: $20,737

This post: Priceless.

via the Greater Fool