Personal Finance – Work Learn Parent

The most important metric for assessing your financial footing

Question: What is the best tool you can use for judging your financial fitness?

You think it’s your credit score? Think again.

There’s been much written lately about how pitiful financial education has been for most grown-ups. Because of the lack of formal education, people learn on the job, from the internet, from their friends, and from their parents.

While a person can stockpile a lot of money savvy from these sources, sometimes what “everybody says” also turns out to be wrong. Or, at the very least, somewhat misleading.

Take your personal financial situation, for instance. How do you know when you’re doing okay, when you’re struggling, and when you really need to reach out for help?

Is it, a dip below a certain balance in the ‘ol savings account? Is it your credit score? Or is it when the creditors’ calls interrupt every waking minute of your life? (Hint, if you’ve gotten there, it’s definitely time to call in some backup).

For many people, credit score is the be-all and end-all financial metric that has them resting easy at night. As long as that’s okay, they’re doing things right.

That’s only true for your creditors. If you understand Canada’s credit system, you’ll know that the creditors are happy when you can keep up with your minimum payments.

Further to that, your credit score will stay pretty perky as long as you pay all your bills.

Here are some other things that affect your credit score:

Extra points if you’re not borrowing all of your available credit (around a third of your available credit is where most companies like you)
Extra points if you regularly use your revolving credit

If you’re using only a third of your available credit, though, that can be a ton of debt. For instance, if you have three credit cards, all with 20,000 limits, and you’re carrying a third of your available debt on all three you’re about 20,000 in debt, give or take just on your credit cards. At 19% interest that’s far from ideal.

Add to that you’re mortgage and two car payments, and you’re really up to your neck in debt.

All this adds up to one point: just because your creditors are happy, doesn’t mean you should be.

Don’t get me wrong, your credit score is definitely worth paying to, because it’s a tool to access financing for things you might not be able to buy with cash. It can also affect your job prospects, your ability to sign up for a cell phone plan, and tell a landlord whether or not she should rent to you. So definitely, keep your credit score in check. Just don’t use it to judge your financial health.

Instead, here’s where you should aim:

The one aspect of your personal finance that you should focus on:

Your net worth. That’s right: all that you have minus all that you owe. This little math equation will tell you what shape you’re in to handle the future. The banks use it to help calculate your suitability for a mortgage for a reason: if you liquidated all your assets (that is, sell off your house, your cars, your investments, and your stamp collection) and used the cash to pay your bills, where would you be?

Now, I’m not saying you need to end up in the black on this. If you’re a new homeowner, for example, you probably haven’t got a lot invested in your house yet. But it’s a sobering look at what you’re doing and where it’s leading you.

You can feel really wealthy if you lease a hot car, rent some swanky digs, and buy high-end duds on credit. And you may feel like you’re doing alright if you can keep up with all these payments. But if you figure your net worth, you’re likely in the hole. Not so hot. Here’s a simple example of a net worth calculation, also called a Personal Financial Statement:

Net worth: 82 000

Net worth can improve in one of two ways: buying more assets, or paying down debt.

Assets are things you buy with your money: they can be investments or houses or jewellery or art. When you apply for credit at a bank they’ll count cars as assets because they can be sold off for money, but for your own figures I would count them as an expense since they devalue over time.

Paying down debt might not mean too much for your credit score, but it sure improves your net worth.

So there you have it. Lighten up on the credit score, and focus on improving your net worth. It’ll pay off in the future.

The information contained on this blog post is the opinion of the individual author based on personal observation, research, and experience. Because each individual’s situation is different, the reader should consider working with a Financial Planner for their specific financial needs.

How to buy a used car

For those of us with no mechanical abilities, and (extremely) limited haggling skills, car shopping is intimidating, to say the least. However, sometimes it’s gotta be done. So buckle up!

“Buying a used car is like buying a pig in a bag,” my dad told me recently. After he explained his colloquialism, I realized he was right: you really have no idea what you’re buying when you purchase a used car.

However, you can hedge your bets by being the most conscientious and careful consumer possible. While a dealer bears some responsibility for giving you the information you need, in the end, the onus is on you to get the best deal possible.

Here are some things you can do to improve your chances of getting a good vehicle at a reasonable price:

Know what you want:
Going to a car lot to look for “a car,” with no other parameters in mind, is no way to go. Do your research. The good Lord gave us the gift of the Internet – use it.

Research into the brand helps. There are websites that let you sit in on a virtual test drive. Some car review websites give you expert analysis comparing one car company to another in the specific body type you want. You can find out specs on size, features, seat comfort, and common problems. If you need it, you can even find out the towing capability and the amount of fuel it’s likely to use.

You can also find out what previous consumers have had to say about the type of car you’re considering. For those Amazon.ca users who frequent the “customer reviews” section, you may find this especially helpful.

I remember looking up minivan reviews and seeing that one particular brand was said to “eat brakes like pizza.” All this is information to keep in your pocket, but it may or may not have a bearing on your decision. On the other hand, I heard another rumour that a certain brand of minivan tended to leave its transmission on the road around 120,000km. I can guarantee I wouldn’t have been purchasing a that particular van with 115,000km on it for instance.

Find out as much as you can about your target vehicle
Now’s the time to check out specific vehicles: to drive, to ask questions, and to inspect.

Test drive the car and inspect it yourself. Make note (and that means actually write down) any noises, scratches, dings, or other potential problems that come up while you’re driving. Try all the things you will use in the car: the seat adjusters, the doors, the mirrors, the sun roof. Sit in the back seat to see if it’s comfortable and make sure everything looks good. You can write in a deal that the dealership fix, say, a windshield chip, before you take it home. It’s harder after it’s left the lot.

Regardless of the research you’ve done it’s tough to know what maintenance you’ll have to do with any car in the future. Some cars just withstand the test of time better than others. Previous owners – and how they treated the vehicle – can have a big impact on the wear and tear.

Car proof reports can tell you if the car has had accident or other insurance claims, how many owners the car has had, and can provide some maintenance records. They are great information and are provided free by some dealers.

It is a good idea to have a third party (read: not dealership employed) mechanic take a look at the car you’re considering. Especially if the Carproof showed an accident report in its history.

A mechanic can tell you if any part of the car is going to need immediate attention, and might be able to notice things you won’t – like if a car is improperly patched up after an altercation with another vehicle. You will have to pay the mechanic for his/her expertise. You will have to take the afternoon to get the car to your mechanic and back to the dealership. It is worth it.

After all this consideration, pick your target vehicle – but keep in mind and in hand the ads for the other vehicles you were checking out. You can use them to bolster your confidence, and to play your hand better during negotiations.

It’s haggle time
If you’ve made it this far, you’re probably pretty far invested in your target vehicle, and that’s okay. But don’t be afraid to walk away! I’m pretty sure car sales reps can smell desperation.

Decide what you’re willing to pay for the vehicle. Forget the sticker price for a minute and decide what you think the car is worth and what your budget will allow. Establish in your mind an offering price and how high you’re willing to go. When it comes to haggling, do not deviate from this plan!

Mention all of the notes you made about the vehicle’s condition at this point.
This is the point that you discuss payment options with your salesperson. Will you finance with a dealership or a bank? Have you saved a fat wad of cash, and you’ll be using that to pay? Now is also the time to dicker about the price you’ll get for a trade in, if you have one. Be fierce, my friend. Know what it is worth beforehand so you can go in with confidence.

Do the deal
There are lots of things that happen after you’ve decided on a vehicle and a price, and it will vary depending on where you buy the car. Make sure you’ve signed your important papers, have your ownership and plates sorted out, and have spoken with your insurance company to get a temporary insurance card so you can take your car home.

A dealership will take a few days to get the vehicle ready to go. It will need to pass a safety inspection, and they’ll take care of any problems you found during your test drive. In the meantime, you need to secure your financing (or dig up your cash from its hidey-hole).

When you reappear with money in hand, you will get the keys and drive home satisfied, knowing you did your best to get a good deal.

Buying a car is more complicated than it should be, given how often these transactions go down. That said, you can be all the way through, from research to new ride, inside of two weeks if all goes down well.

When is the Right Time to Talk to Kids About Money?

When I was a kid, I didn’t talk to my parents about money. I gleaned financial lessons from overheard arguments involving cut-up credit cards, and reminders that we needed to defer shopping until we got the “baby bonus” (the charming nickname we had for the government’s child tax benefit).

While it wasn’t necessary for me to get all the information behind these scenarios when I was nine, surely hearing things without understanding them left some sort of imprint on my feelings about money as a grown up.

It can be tough to decide exactly how much information to share with your kids, and when. It can be even tougher to override your own internal tapes, which dictate your relationship with money, so you don’t pass the same message on to your kids.

Money is almost as bad as sex in its taboo nature: parents don’t want to talk about it out loud, and they definitely don’t want their kids knowing what’s going on right under their noses.

If parents don’t kids the ins and outs of using money, how are they going to learn? Will they have to suffer through crushing debt before realizing how important it is to borrow responsibly? Will they hoard and safeguard money for fear that they’ll run out, never balancing the need to enjoy the fruits of labour in everyday life?

The best plan is to do some teaching yourself to ensure youngsters have a solid base in financial knowledge. When do you start those lessons?

Sooner rather than later
“Research shows that starting to learn about money as early as possible is a great way to give kids a head start in the process of building healthy financial habits,” said Jane Rooney, Canada’s Financial Literacy Leader, in a press release from April 19, 2017 from Canadian Foundation for Economic Education (CFEE). CFEE’s program “Lets talk with our kids about money” provides free educational resources to parents and teachers, and the lesson plans start for kids as young as five.

Of course, if you’re teaching money matters to kids who are just learning to talk, the lesson has to be child appropriate. Start with the value of money, how the money we spend comes out of the money we make, and that there’s a limit to how much we have.

“Talk about work – teach your child about the relationship between work and money,” suggests GetSmarterAboutMoney.ca, a website run by the Ontario Securities Commission.

If you need some inspiration for how to start, The Consumer Financial Protection Bureau has suggestions for age-appropriate money skills you can work on with your child.

Watch your words
When you choose to talk about money is really important for kids. But never underestimate the power of the words you use to convey the information. Parenting experts tell us there are good and bad ways to talk to kids about money. For instance, you never want to tell a child “that’s too expensive, we can’t afford that,” especially if you go out and buy the item anyway.

Instead, if your kid gets a case of the gimmies, tell them it’s not in the budget; it’s not about running out of money, it’s about running out of money in that budget line.

“When you’re ready, tell your child that you cannot buy new toys right now, but perhaps the toys can be put on a wish list,” suggests KidsHealth.org. “Be honest with your children — but don’t tell them more than they need to know.”

Walk your talk
After you’ve started teaching kids how to use money responsibly, make sure you follow your own advice. “If you are an extravagant shopper yourself or are wasteful with money, it does not set a good example to your kids on how to manage money,” advises the Child Development Institute.

Above all, don’t fall into the trap of getting defensive or cagey about what you have or don’t have. Money is a tool we use to get through life. Your bank account isn’t a testament to your personal value, nor does it reflect your kids’ worth. If kids are worried about what other families have that you don’t, the best thing to tell them is exactly what you should be telling yourself: just because others have it doesn’t mean they can afford it, and perhaps you are prioritizing different things with your money.