Thursday, January 7, 2016

Questions from Financial Hell

Every so often I encounter a simple financial question that makes me cringe. It’s not that the asker is a bad person or that the question is stupid. It’s just that the question gives me a peek into a financial world that looks scary to me.

I like to help people, but sometimes it’s hard to know where to start. Here’s the list of questions (edited for brevity) that I’ve collected so far.

1. Does a mortgage count as debt?

Uh, yes. And consolidating your debt into your mortgage doesn’t count as paying off your debt. Don’t fall into the trap of thinking that a mortgage is good debt. The house is good and the mortgage is bad. Most other types of debt are even worse than a mortgage.

2. Do I need an emergency fund if there is still room left on my line of credit?

Yes. Don’t think of room on your line of credit as available wealth to spend. One of your goals should be to pay off your line of credit and live debt-free. Emergencies shouldn’t throw you into more debt if you can avoid it.

3. How many credit cards is it safe to have?

For some people the answer is zero. For those who pay off their credit cards in full every month, it’s a good idea to have two cards in case one is mistakenly refused at an inconvenient time. Having many cards and using one to pay off others is just a gateway drug to payday loans and ultimately bankruptcy.

4. Should I get a loan to buy an RRSP?

Probably not. Borrowing for an RRSP contribution is rarely a good idea, particularly for those who think RRSPs are something we buy (they are just accounts that hold the investments we buy). Learn to spend less than you make. Once you have some excess income, open a TFSA or RRSP account to save and invest this money.

5. How did my trade-in make my new car’s payments higher?

You owed more on your trade-in than it was worth and the excess debt got thrown onto your new car. Going further and further into debt for cars is stupid. Until you can buy a car outright for cash, consider not owning a car or getting the cheapest car that will meet your needs (not your wants).

6. Why does my pay sometimes go into my account 2 hours later than normal?

I don’t know, but it shouldn’t matter. Maybe you like to monitor all things related to your money very closely. You’re entitled to spend your time as you see fit. But if you know when the money hits your account because you’re living hand-to-mouth, consider trying to save up a small cash buffer.

My short answers are unlikely to fully address the needs of those who ask these questions. I try, but Gail Vaz-Oxlade would certainly be much better able to help.


  1. Gail would eviscerate whomever asked those questions, but it would be a lot of fun listening to her do it.

    If I have a pension do I need to pay off my mortgage before I retire? (another good question)

    1. @Big Cajun Man: Good one. Even scarier would be "If I have a pension do I need to pay off my credit cards before I retire?"

    2. Yes, that is beyond scary (and unfortunately another comment/question I have heard from colleagues).

  2. The last question reminds me of a string of complaints Tangerine bank received on Facebook. People's pay was deposited a few hours later than usual and some ended up with tanks of gas they couldn't pay for or groceries they couldn't afford.

    1. @Gene: That's a sad place to be financially.

    2. Banks have been busted for shuffling the time of payments and deposits in order to send accounts into over draft so they could collect fees (is there anything illegal they won't do?!). Short funds are not always the fault of the account holder, usually, but not always.

  3. Just goes to show that wide-spread basic financial literacy and education are in greater need. Schools don't teach it and the financial sector is all about marketing and keeping people financially GVO would be as good a place as any to start.

    1. @SST: Financial education certainly helps if it isn't influenced by financial institutions. But I think it will never be enough on its own. I'd like to find creative ways to limit people's access to debt. One possible direction is to make it easier to walk away from certain debts. This would make lenders think twice about extending credit.

    2. As rare if that is, I strongly disagree with your idea to make it easier to walk away from certain debts. IMHO, it will backfire: loans will still be given, but prices of goods and services we all will have to pay will go up. Bank cover their losses from our pockets, not theirs.
      I think a better way would be to change bankruptcy law to make bad debtors more responsible for their choices. Otherwise prudent ppl will always have to pay for stupid; I find this to be fundamentally wrong.

    3. @AnatoliN: I don't see why prices of goods and services would rise if more people are able to escape paying credit card debts to banks. The actual effect would be that banks would give out fewer credit cards.

      Banks would love to see stricter bankruptcy laws. They would then be able to lend indiscriminately to people who clearly couldn't pay the money back and would be able to bleed them of their meager future incomes.

    4. My thinking:
      When somebody "escapes paying credit card debt", how do banks cover the loss? - Prudent clients pay higher fees and interest.
      Now that almost everybody considers themselves a real estate investment genius by taking equity from their homes to buy a new BMW or vacation, we all face stupid home prices and high taxes.

    5. @AnatoliN: If banks could charge higher interest rates from their prudent clients they would already be doing so. Their actual response would be to offer fewer people credit cards.

      It is easy access to mortgages that is driving up real estate prices. If banks had to hold onto the risk for the mortgages they write, they might be more careful.

      Our high taxes are driven by past borrowing by governments and a bloated public service that doesn't rid itself of poor employees often enough.

    6. @AnatoliN If you mean higher home prices cause higher property taxes, that's not how it works. If all assessed home values rise by the same amount, nobody's property taxes change due to the rise in assessed value. It's only if your assessment goes up relative to others in your municipality that your property taxes will go up.

  4. For 4 (RRSP loan) I agree with rarely. but..
    What are your thoughts on one this year (specifically this year, in that 44-90k range)?
    Am I correct in that there is an inherent 1.5% in it?

    Was not able to max my RRSP last year because of the extra TFSA room.

    1. @aB: It's always possible to do an analysis that concludes that taking an RRSP loan makes sense. These analyses assume stable conditions. The question you need to answer is whether this extra 1.5% you'll get for 2015 but lose in the future is worth the interest you'll pay as well as the added pressure debt brings if you get some instability in your financial life. Sudden emergency expenses, job losses, and other events can cause you to take on extra debt. An RRSP loan would make that worse. These unpredictable events are hard to capture in numbers but they matter a great deal.

      I still think it doesn't make sense for most people to take on RRSP loans, but I won't say never. Tread carefully.

  5. My favorite one is about the number (!) of credit cards.

  6. The exchange below is reproduced to remove broken links:

    ----- BHCh January 10, 2016 at 3:16 PM

    It was very easy for US borrowers to walk away from their mortgages once house prices dropped. Banks lost a shitload of money and the taxpayer had to foot the bill. Banks got the blame, not individuals who borrowed irresponsibly and then defaulted.

    Hardly something we should be imitating. If individuals make irresponsible decisions, there should be serious consequences for them. Otherwise bad behaviour is encouraged.

    ----- Michael James January 10, 2016 at 5:40 PM

    @BHCh: That's an extremely one-sided characterization of the U.S. housing crisis. However, it's not mortgagees that I had in mind with my comments. It's people with low incomes who get into trouble with credit cards and payday loans that I had in mind. IMO, financial institutions that go after such people to offer them credit are predatory and I'd like to make it easier for these people to get out of debt cycles. It's the bad behaviour of lenders that I don't want to encourage.

    ----- BHCh January 11, 2016 at 8:00 AM

    Individuals are ultimately responsible for their own action. You are talking as if people with low incomes should be patronized because they are incapable of being responsible and someone else has to be blamed.

    ----- Michael James January 11, 2016 at 8:42 AM

    @BHCh: People have weaknesses and it makes sense to place limits on the ability of sophisticated businesses that exist to exploit those weaknesses.

    ----- SST January 11, 2016 at 10:19 AM

    @BHCh: it's not that people with low incomes are irresponsible, it's that they lack the knowledge to act responsibly. With national financial literacy @60%, I'd bet that close to 100% of low income earners are financially illiterate, thus perfect targets.