Good Debt Versus Bad Debt: Part II

Most people carry some type of debt at some point during their lives, whether it be good debt or bad debt. At Share the Wealth, it is our goal to educate you in financial literacy, including the concepts of debts.

Last week, we discussed different types of bad debt and it's consequences. On the contrary, good debt makes you money in the form of tax deductions or cash flow or equity or a combination of these benefits. Good debt most often is borrowed at a low interest rate that allows you to grow your wealth while it provides ‘passive income’ (income you don’t have to work for).

• A mortgage on a rental home or apartment is considered good debt, if the money coming in from rent each month exceeds the expenses. This is called positive cash flow or passive income. The mortgage interest is also tax deductible as are the expenses of running and maintaining the property.
• An investment loan can be good debt as well. Investment loans (aside from RRSP loans) are tax deductible, up to 100%. If your investment loan is invested in income producing assets, then you are able to use the income earned to pay off the debt and have cash flow

Bad debt refers to consumption, such as spending on furniture, electronics, and cars, items that do not provide income or appreciate in value. Good debt is used to purchase assets that appreciate in value and provide cash flow. When you consider your debt, it is best practice to pay off your bad debts first, such as paying off your credit card before your rental mortgage. The old adage rings true “Borrow to invest, never to consume”, if you want to build your wealth.

Good Debt Versus Bad Debt

Most people carry some type of debt at some point during their lives, whether it be good debt or bad debt. At Share the Wealth, it is our goal to educate you in financial literacy, including the concepts of debts.

One type of debt, bad debt, can financially ruin a person, reducing your net worth and any cash flow you may have.

• Although some people believe otherwise, your residential mortgage is a bad debt. You are not receiving cash flow from your home, rather it is costing you money each month. At worst, your home can even be a depreciating asset, in seen in the recent real estate market correction in 2008.
• Pay day loans have the potential to be the most dangerous type of bad debt. A payday loan company advances you money from your next paycheque a week or two early, then charges you a rate of interest that can sometimes total more than 400% per year, on top of the principal repayment each time. Often the borrower has little choice but to take another loan out as they would otherwise have no money to live on if they don’t, until the next paycheque, and the cycle continues.
• The most common type of bad debt is credit card debt. If you know you will be carrying credit card debt, it is important to know your options. Research different credit cards with different banks and find the lowest annual interest rate. If you have found yourself stuck in credit card debt, get in touch with your credit card company and request that you get a lower interest rate or you will transfer the balance to a competitor. They will usually comply.

On the contrary, good debt makes you money in the form of tax deductions, cash flow, equity or a combination of these benefits. Good debt is most often borrowed at a low interest rate that allows you to grow your wealth while it provides ‘passive income’ (income you don’t have to work for). Join us back here on Thursday to learn the benefits of good debt.

Put Your Tax Free Savings Account to Work for You

The Tax Free Savings Account (TFSA) was introduced by the Government of Canada in the 2008 Budget, and was available to invest in beginning on January 2, 2009. This TFSA allows Canadians, 18 and older, to invest up to $5,000 annually of their after tax dollars, and to grow tax-free.

Given the financial crisis and subsequent economic crisis of 2008, the creation of the TFSA was a smart move from the perspective of the federal government. Whenever the government wants to influence consumer behaviour, it does so by creating tax incentives or penalties, depending on the result it wants to create. The creation of the TFSA provided encouragement to everyday Canadians to save their money and put it in their new TFSA bank accounts, at a time when banks were losing capital and tightening up lending. By encouraging everyday Canadians to re-capitalize the banks, there is more cash available to lend back to us, and thus keep the economy from falling into a further recession or even a depression. For more information on how money, banking, and debt really works, please watch this video.

The TFSA does have many possibilities and a lot of perks:

• Withdrawals from your TFSA are tax-free, unlike an RRSP account, and you are able to withdraw your funds at any time
• Investment income earned in your TFSA is tax-free
• Full amounts of withdrawals from your TFSA can be put back into your TFSA in future years
• Any unused TFSA contribution room you have is carried forward and accumulates in future years
• Money can be given to a spouse or common-law partner for them to invest in their TFSA

You have many different options when investing with your $5,000 TFSA:

• You can invest in foreign dividend companies and withdraw your dividends up to $5,000 per year tax-free. If you were to currently do the same strategy in an RRSP, your dividends would grow tax free, but you would be taxed on withdrawals.
• You can invest your $5,000 in a savings account and watch your money grow tax-free.
• Many people have turned their TFSA into an emergency fund. As it is important to have an emergency fund, having the luxury to withdraw money from your emergency fund tax-free is always a bonus.
• For many Canadians, investing in a TFSA for retirement is ideal, although because you can only invest $5,000 annually, it will be difficult for most Canadians to have enough money in their TFSA alone to live off of during retirement.

Along with any great thing, there are always a few downsides:

• You cannot claim your capital losses
• Your contributions are not tax deductible
• Depending on the vehicle you are putting your money in, it may not be worth it. For example: even high interest savings accounts right now are only paying between .75% and 1.25% per year. On $5000.00, at 0.75% interest (assuming you opened your account and deposited $5000 on January 2^nd 2009) you would have earned $37.50.

The median taxable income of Canadian’s is $50,000.00 per year. In BC, at that marginal tax bracket, if you earn $50,000.00 per year in employment income, you pay $9,065.50 in taxes. If you add the $37.50 income you earn from putting $5,000.00 in a TFSA all year, you increase your tax burden to $9,076.64. Which means that you keep the $11.14 additional you would have had to pay in tax in 2009. If your ‘high-interest’ savings account pays 1.25%, then your interest income would be $62.50 and you would save $18.57 in tax for 2009. Is it worth it to tie up your money all year for such a low rate of return, tax and otherwise?

All in all, the TFSA is a move in the right direction as it allows you to invest $5000 tax-free and withdraw your capital and interest, dividends or capital gains tax-free! Be sure to look into various investment vehicles that will make it worth your while to participate. Please contact us at Share the Wealth for more information on TFSA-eligible opportunities.

Disclaimer: At Share the Wealth, we are not certified Financial Advisors or Financial Planners. We are everyday people who have built up our financial literacy and are passionate about helping others to learn how to make their money work for them. The information on our site and blogs is intended to be information only, not financial advice. Always consult with a licensed Financial Professional before making any investment decisions.

Conscious Spending: Observe Where Your Money is Going

Lets get started!

The first step on the road to Financial Independence is observing where your money is going. Not judging, just observing. The easiest ways to find this out are by tracking your spending for a couple of months. Here are three easy ways to track where your money is going:

1. Collect a receipt every time you buy something. Empty your purse or pocket daily and put it on a spike on your desk or hall table. At the end of each calendar month, take a piece of paper, or use an Excel spreadsheet (we have samples you can download off our website), and note categories of where you spent your money.

The categories to keep track of your spending could include:

• Car: gas, carwash, oil change, windshield fluid, maintenance, etc.
  
• Groceries: food, spices, condiments, etc.
  
• Toiletries: toothpaste, shower gel, makeup, etc.
  
• Entertainment: dining out, coffee at Tim Horton's or Starbucks, video rentals (and late fees), concerts, computer games, etc.
• Gifts: birthday and Christmas presents, etc.
• Clothing: shoes, boots, coats, etc.
• Health: gym membership, yogas classes, sports equipment, etc.

You'll also likely have bills for a cell phone, landline, cable, hydro, and gas - you should also put those on your spike too, once you've paid them. Create a 'Utilities' category for this sort of expense.

Tally up the totals. Don't judge where or how you spend your money, just record it. Tip: *Be honest about whether an item belongs in 'Entertainment'. For example, "taking kids to McDonalds" is 'Entertainment', not considered 'Groceries' and a "pedicure" is 'Entertainment', not considered 'Toiletries'.

At the end of the month, your bank statement will have other withdrawals on it, such as your rent or mortgage payment, insurance, property tax, strata fees, car loan payment, etc. Be sure that all is categorized and accounted for on your paper or spreadsheet.


2. If you have a tendency to forget to ask for receipts or lose them (my husband is notorious for this), put EVERYTHING on either a credit or debit card. Using this method, you have a printed record each month as to what you spent and where. From your monthly bank statement, you can go ahead and record your categories and see where you are spending and how much. **If you are using a debit card, make sure to have a banking plan that is unlimited or that charges you no fees for withdrawals (Coast Capital Savings may be a good bet).

3. If you use credit cards for everything, make sure you are already very disciplined about not overspending, because without fail, you MUST pay off the balance in full before the due date. You can set up your online banking to automatically pay the amount in full by the due date each month so that you don't forget! Also make sure you are using a card with no annual fees. Credit card companies will usually give you the option of having no annual fee, but in exchange you will have a higher interest rate - take this option because you are not going to pay them a penny of interest anyway by paying off the principle in full each month.

Choose a credit card that gives you a 'Cash Back' option, or one that has Airmiles, or some other freebie. We use the VISA Platinum Avion, and by putting everything on there, we are able to take a free vacation each year. This card does have an annual fee of $120.00, but that is much less than the cost of two or three plane tickets, (and we record the $120.00 cost in "Entertainment").

You might think this is easy. Awesome - go for it! Others of you may think this is as much fun as having your skin pulled off. Trust me, I understand. One of the ways I was able to take this action step was to hire a coach (soliciting a solid, organized friend could have worked too, but I didn't have any friends like that at the time!) to walk me through the steps and keep me accountable to do it daily.

I committed to setting up a new habit - putting the spike where I could see it on my desk, and emptying out my purse each week when it was starting to overflow. It only took a few seconds to write on the back of the receipts what the expense was (car, groceries, etc.) and put the receipts on the spike each time. I booked two hours in my calendar on the first of the month, so I had time devoted to writing down the categories, recording my spending and writing up the totals from the month prior. After the second month, it became faster and easier. I was then ready to take a look at my spending habits - and wow!! I was able to see clearly what kinds of choices I had unconsciously been making - some were right on track with my values, and some not - and it became the beginning of a richer, more conscious lifestyle - more on this topic next month! For now, just start tracking!!

For a sample spreadsheet that you are welcome to use, please visit the resources section of our website.

Welcome to Share the Wealth Blog!

I'm happy you made it here!

I'm an average Canadian woman who became financially independent at the age of thirty-something. I also believe that anyone who has the interest, discipline and commitment to the process can achieve financial independence too.

Does financial independence mean that 'I spend whatever I want, whenever I want'? Not at all. What it does mean is that my financial needs are met whether I work or not. What I have is an abundance of TIME, which is how the wealthy define true wealth. An abundance of time allows you to have the freedom each day to pursue activities that may or may not generate a pay cheque. When you have time AND your financial needs are met, the sky is the limit to what you can create, achieve, and enjoy.

I am motivated to share my journey to financial freedom in the hope that it will help you. I want to do this for two main reasons:

1. I hated being dependent on someone else (such as an employer or spouse) for my survival and I assume many of you feel the same way.


2. I believe that blindly handing our money over to others can set us up for financial disaster - and that when we are armed with financial education, we can become financially free.

It has taken me five years to get here. Many of my struggles were rooted in not understanding financial language. I also thought that somehow my own finances were 'off-limits' - that I was somewhat not qualified to manage my own money effectively. And in a sense that was true. No-one had ever talked to me about finances when I was growing up, and I certainly didn't learn it at school or at work. However, I was absolutely determined to develop my financial literacy and take control over my financial future.

I personally invested a lot of time and money in seminars and workshops only to end up frustrated. Over and over again I was left without any tangible or practical information that I could use to build my financial knowledge base. A lot of seminars were very sales based, and not educational. Conversations I had with financial advisors were often similar.

I committed to 'learning by doing', by surrounding myself with other investors and entrepreneurs that were already successful. I asked them lots of questions, I read their books and their blogs and I copied what they did. I made lots of mistakes and have had lots of successes too.

What I now appreciate about how money and wealth creation works is that it is not rocket science. Some 'financial experts' will have you believe that money management is rocket science to encourage your dependence on them. Well, enough of that! Although I am not a financial advisor nor a financial planner, I will share some practical tips and suggestions that have worked for me and you are welcome to try.

So here is what you can expect here at Share the Wealth. Each blog will give you information on topics that include:

1. Tracking where your money is going to and coming from


2. Clarifying your values and priorities and committing to a course of action


3. Eliminating bad debt and creating a surplus of income


4. Getting clear on how much money you need to bring in passively to cover your expenses


5. Understanding basic financial, tax and accounting language


6. Learning what types of due diligence questions to ask and what research to perform when investigating investment opportunities


7. Tricks, tips, and rules that could help save or earn you thousands

Please stay tuned for our blog post on Monday, December 14th - "Conscious Spending: Observe Where Your Money is Going!"

Welcome to Share the Wealth

At Share the Wealth we believe that a rich and meaningful life also includes financial independence – meaning that if you choose to stop working, your income would continue to cover your expenses indefinitely, leaving you free to spend your time focused in other areas!