Are Debt Payments Too Low?

After recently buying my new car, I admit I actually didn’t know how much my minimum payment would be on my line of credit that I used to pay for it.  So I just got the statement yesterday and I was shocked on how low the minimum payment was: $50 per monthPardon?!? Did someone screw up the math on this one?  At that low of a minimum payment I’m not even covering the interest each year.  If someone kept doing that you would never pay it off.

So what’s the problem here?  Well I suspect the issue is when my line of credit was setup in the first place I didn’t pay much attention to the payment options and the bank checked off the option of interest payment only.  Because I only borrowed the money for half a month I haven’t actually hit the full amount over $50, so hence the insanely low minimum payment for the first half month.  Next month I will likely owe at least the interest due or just over $60.

Yet with such low payments it becomes easy for people to think that a payment of like $100 month would be ok.  When in fact that low of a monthly payment it will take 23 years to pay off my car.  Sort of defeats the purpose of the loan if the asset I bought with is long gone before I pay off the debt.  What happens if the minimum payment is pushed up to 1% of the balance or $185 a month? In that case the loan is paid off in just over 9 years.

The fact I can choose interest only payments is rather insane to me.  Granted I’m a responsible borrower, but it would be nice for the government to look out for people that don’t think about money as much as I do.  After all with all these warnings about our debt, it would be nice for the government to suggest something simple.  Change the line of credit rules to make all minimum line of credit at least 1% of current balance.  Yes that would drive up a LOT of people’s payments, but in fact it might cause some of us to at least think a tiny bit more about what we can afford.

So what do you think?  Should minimum payments for debts be higher?  Or is that turning us into a ‘nanny state’?


Too Much Faith?

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

The basis of my retirement plan involves having the majority of income coming from stocks that pay dividends or interest from bonds.  I have assumed that when I have enough money invested, the cash flow from my diversified portfolio will replace my household income and I won’t have to work anymore.

Over the weekend, Mark Cuban (billionaire owner of the Dallas Mavericks) wrote an interesting blog post about how the market is broken, titled “What Business is Wall Street In?”.  He suggests in his article that the market is no longer efficient and is being run by traders, who he likens to hackers – exploiting the operating system and application shortcomings of the system.  These traders are breaking the “Wall Street System”, which was created as a method of raising capital, and turning it into a place where robots are making percentages of pennies per trade.

The economy in general seems fairly fragile.  Look at what happened to the marketplace in 2008, whether it was stocks, bonds or real estate, the market tanked for a significant period of time and wiped out vast fortunes.  Given the fact that investors have minimal or no control over the marketplace, it seems a little risky to put a ton of money in there, but that’s what most people, including myself will do – hoping it’s still there when we need it.

When I look at my other options of what to do with my money, I’m okay with the risks associated with the market.  My feeling is that if the marketplace completely fails, there will be much bigger problems than money.  As much fun as having a treasure chest full of gold in the backyard, I don’t think I’m going to become a gold bug anytime soon.  I don’t assume that all my money will disappear once invested, but I realize there is a small chance that during a crash I may get wiped out, no matter how strong the companies I’ve invested in or diversified my portfolio was constructed.

I look at any marketplace as gambling at much lower odds than sports.  I realize I am really outclassed by the majority of investors out there, both in capital and knowledge (Editor’s Note: I highly doubt that on the second one…remember mutual funds).  My plan is based on cash flow returns, and hoping that I can stay ahead of any significant changes in the companies I have invested in.  I have to assume and have faith that the whole market will not be reduced to a rubble in the 50+ years I will be investing or living off of my investments.

So in the end, do I have too much faith? I’m wondering what other people’s opinions are?  How do you diversify your retirement savings?  Do you have some sort of “black swan” investment strategy?  Or are you like me and just hope for the best (while attempting to diversify as much as possible)?

Encouraging my kids to save

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

My oldest son, Michael is eight years old and money burns a hole in his pocket. He earns $5 once or twice a month for returning bottles and cans that we use for recycling. This gives him some money that is his own, and he can do whatever he likes with.

At first, he spent it on candy, but I soon realized that he has a lot of trouble holding on to money. One time, he spent all $5 at a bake sale at school where each item was $0.50. He got more food than he could eat, just to have the satisfaction of spending his money. One of the side benefits was seeing him being generous in sharing the treats that he bought. I think that having your own money that you can spend is a necessary first step to be able to build the confidence for saving a portion.

After Michael had an opportunity to spend his money regularly for about a year, my wife and I decided that it was time he learned to save. He often wants to play games on my iPhone and he has talked before about having his own. Maybe eight is a little young, but we told him that if he saved his own money, he could buy an iPod Touch. This was triggered by a gift of $100 from an aunt (who visits rarely). It made the goal realistic, but also made us realize that we weren’t comfortable letting him make the spending decision all on his own. (We can’t handle $100 worth of candy and cheap toys.)

Having a goal is a good motivator. Now Michael is able to approach “I want” situations as a choice between what he wants now (usually only briefly) versus the iPod Touch that he’s saving towards. But having cash around was still a problem, so we went to the bank and opened a savings account for him. (Pro tip: even if the bank offers a kid’s account, it might be far easier to open a second account in your own name.) Michael is very proud to have his own debit card (used only for deposits so far) and he keeps his receipt from each deposit to track his progress toward his goal.

It’s simplistic, but having a bank account has encouraged my son to be responsible with money and having a medium-term goal (he’ll have it by Christmas) has given him practice with trade-off type decisions (this vs. that, now vs. later). How do you teach kids to make smart choice about money?