It’s Never Been Easier To Put Money Away in RESPs

You guys might think us here at the Financial Uproar machine (138 HORSES OF PURE POWER, BABY!) are somewhat anti-child. After all, I penned a piece back in the day saying you’ll probably end up richer if you don’t have kids.

Saying that, there are plenty of reasons to have yourself a rugrat or two. They give you and your spouse something to talk about once you realize he’s never going to grow out of that stupid phase of liking baseball. Having little mouths to feed motivates even the laziest of slackers to finally get a job that doesn’t include wearing a visor. And I guess it’s rewarding watching your kids turn into productive members of society.

Oh, and I almost forgot the biggest reason. At least you’ll have somebody to visit you at the home during your golden years.

It’s harder than ever to be a parent today, at least according to the knower of all things, the internet. It costs something like $250,000 to raise a kid until they’re 18. Adult situations are constant on the TV and interwebz. You can’t tell your kid to go play in the street like it’s 1962 anymore. And perhaps worst of all, it turns out not everything is the teacher’s fault.

A cold chill just ran down my spine, guys.

A big fear for parents has to be post-secondary education. In today’s world, education is more important than ever.

Long-time readers might remember hearing about my path and how I didn’t go to school, choosing to work instead. This is a path I still think can work. But most people won’t bother, content instead to go off to university and get a degree. The usefulness of certain degrees will always be up for debate, but the fact remains that guys like me without college do tend to do worse than our more educated peers.

Besides, it’s every parent’s goal to have their child go off to university. Even if the kid doesn’t go, it’s not like all is lost. Junior will still have most of his RESP available for buying a house or whatever. (Remember, the government top-up gets forfeited if the beneficiary doesn’t go to school, but they’re still free to keep the rest of the RESP.)

Or to put it more simply, it’s better to arm your offspring with cash to go to school and have them not need it than the other way around.

Fortunately for parents looking to save for junior’s education, it’s about to become even easier.

Free money, baby

Justin Trudeau, Canada’s BOYISHLY HANDSOME new Prime Minister, has been making a few changes since getting elected in 2015. Before we talk about them, can we see a picture of our new benevolent overlord nice leader?

justin trudeau

Oh my (Fans self, prepares the fainting couch).

Many of the big changes came in this year’s budget. Notable programs for us financial nerds include lowering the TFSA limit from $10,000 to $5,500–a move that didn’t win Captain Handsome up there any friends among PF bloggers–increasing included various tax credits to students, and changes to EI that make it easier to qualify for benefits.

And for parents, perhaps one important change trumped them all. A new Canada Child Benefit was introduced, replacing the old program. Parents of children younger than six can receive tax-free payments of up to $6,400 per year per child, with parents of older kids getting up to $5,400 annually.

Canada Child Benefits are based on income, with families making under $30,000 automatically qualifying for full benefits. The amount paid decreases gradually as income increases, going away completely once family income hits $190,000.

Still, middle class families can expect some serious cash from the program. According to the Government of Canada’s official Canada Child Benefit Calculator a family with one kid under six and one over six with $90,000 in family income can still expect an extra $470 per month without doing much of anything.

It’s the closest you’ll ever get to getting free money. Naturally, I demand you do something smart with it. PUT THE GO-KART CATALOG AWAY, BUCKO.

Parents are already thinking about this. According to a poll commissioned by Knowledge First Financial, 70% of parents agree this extra cash will help around the house, and plan to contribute 22% of this extra cash towards further education.

This free cash is the perfect opportunity to contribute to junior’s RESP. Using the example of the family above, each kid would get an extra $2,760 in their RESP without their parents breaking a sweat. These are pretty much the easiest savings you’ll ever get.

It gets even better. Remember, the government will top up the first $2,500 of annual RESP contributions with the Canada Education Savings Grant, which gives $1 for every $5 contributed. That’s an extra $500 for doing nothing on top of the money just received for doing nothing.

It’s not very often opportunities like this come along. I almost want to have kids just to take advantage of it.

I’m glad people plan to use this extra money wisely rather than wasting it on stickers or whatever it is you kids buy for fun. Glitter, maybe. Or temporary tattoos.

This is a great start, but I really think Financial Uproar readers can do better. I want y’all to contribute every nickel of that cash towards giving your kids the best future you possibly can. Every time those cheques show up, picture me above your shoulder like that goofy green guy in The Flintstones, telling you not to squander it.

It’s hard to raise kids. I get that. It’s just gotten a little easier. You owe it to those sad little eyes to do the right thing.

Why Are You Morons Still Living in Vancouver or Toronto?

Why Are You Morons Still Living in Vancouver or Toronto?

Let me tell you a story about the teachers in my small town in Alberta. I promise, there’s a point to it that isn’t just me shaking my fist about how they all get two months of vacation.

Oh, sorry. I mean “deserved time off”, obvs.

Related: that time I made fun of teaching about how it’s not nearly as hard as they think

On the surface, teaching at this particular school looks like a pretty sweet gig. The school is just a few years old with all the latest electronic gadgets you need as a glorified babysitter teacher in 2016. Class sizes are small and the faculty seem like a pretty close knit group of people. You’re done work by 2:00pm on Friday because of a union negotiated contract perk. And some of the students are even attractive. Well, solid 7s at least. We’re talking small town hot here, not Carrie Underwood.

From a monetary perspective, things are pretty sweet too. Each school board negotiates directly with the province, but wages tend to be within 2-4% of each other no matter where you are. So dollars go pretty far in my town where houses can be had for under $200,000. Compare that to Calgary or Edmonton, where the same amount of money is going to get you a small condo in worst part of the suburbs. You’re looking at a minimum of $400,000 to get a decent house in either of those cities.

And yet, every year, the school in my town has vacancies. Between 10 and 20 percent of staff members hit the road, usually to the bright lights and longer commute times of either of Alberta’s largest cities.

The reasons for this are usually pretty obvious. They’re young, and want to live somewhere a little more exciting than a small town. They feel they have better career prospects in a larger center. And most come from large cities (usually Ontario, which has a surplus of teachers). The lack of dating prospects here doesn’t help either. Remember, I’m no longer single.

And yet, career prospects in these larger centers are often crummy. Many can’t get full-time jobs for years after moving into these cities because that’s where everyone wants to be. So they end up on the substitute list, but sometimes that doesn’t even work since more experienced teachers are always applying from out of town and out of province. Some have spent years trying to find that lucrative permanent contract, a piece of paper that says they’re really only going to get fired for exposing themselves to some kid.

I wish I was kidding, but permanent contracts are really that iron-clad. Must be nice.

Anyhoo, let’s get to the real point of this post. Which is if you have a regular job, why in the hell do you live in a big city?

Vancouver and Toronto are the real terrible examples. In Vancouver, unless you want to live in a box in the sky or some suburb an hour away from the actual city itself, you’re shelling out at least seven figures for a house. Toronto is slightly cheaper than the place many contend is corrupted by dirty Chinese money, but its housing market still seems equally ridiculous to this guy who just ended up getting a decent place for under $200,000.

“But those places are where the jobs are” say all the people who live in these cities. I’ll admit, they have a point, but there’s also way more competition in these places. The aforementioned school I was just talking about? They get like five serious applications to fill three vacancies. I like those odds much better than in a large center where you’ll likely have dozens of applicants per open position. And you can’t seduce your way to a job anymore. Cause believe me, I’ve tried.

There are certain jobs you can do anywhere. You can be a teacher or a nurse or a social worker or a mortgage guy in a million different places. Sure, you probably can’t be an oil company middle manager or an advertising guy or whatever else without moving to a city. I get that. But most people aren’t those things. They have very regular jobs.

Small towns aren’t nearly as exciting as big cities, that I get. But let me tell you YOLO LOVING WHOO GIRLS a secret. There becomes a point in everyone’s life when they stop going out every weekend, exchanging a life of adventure for a life of video games in a basement or movies on Netflix. For most people, this usually happens when they have kids, but some of lucky folks become lamer at an even younger age.

When this happens, you won’t get close to using everything a big city has to offer.

And the cost difference! It’s not just in housing prices, which are far cheaper in smaller centers. You’ll also save money on your commute (the wife and I share a car and a tank of gas will last a month), entertainment, eating out, booze, and whatever else you kids literally piss away on “experiences”.

There’s a lot of displeasure about trying to get ahead in Toronto, Vancouver, Calgary, Montreal, and even places like Winnipeg LOL JUST KIDDING NOBODY LIVES IN WINNIPEG. Millennials don’t feel like they will ever be able to afford a place. And even though housing bears are screaming BUBBLE at the top of their lungs, I’m still not sure we’re poised for a crash. The supply/demand equation is still heavily skewed towards demand, especially in the two major centers.

But there’s a really easy way for astute millennials to easily get ahead. By doing the opposite of their peers–moving from a large center to a smaller one–they can take advantage of easier to get jobs, lower costs of living, and still have the opportunity to move up at work. This is especially true if you work for the government and get paid the same no matter where in the province you work.

It’s an easy solution to a very real problem. And yet many people don’t even consider it, choosing instead to complain how they can’t afford a place in two of the world’s most expensive real estate markets.

We live in a world where many of us have the option to make a living from home. Bloggers, vloggers, and other freelancers actually make serious cash doing this stuff, a fact my grandmother refuses to believe. If you’re one of these people, I beg you to settle in a place with a low cost of living that isn’t in Thailand. It’s just a good idea.

How I Made $30,000 Last Week

How I Made $30,000 Last Week

…And no, the answer isn’t by selling drugs. C’mon, man.

Y’all might remember back in the day when the wife and I were thinking of buying a house. This didn’t go so well for a few different reasons, the main one being that we had a price range of between $200,000 and $250,000, and we couldn’t find anything in the price range that wasn’t falling over. So rather than stretching to buy something a little nicer, we decided to rent.

I even went as far as saying that renting will make me a millionaire. Basically, the logic goes like this. By investing money I would normally have stuck inside of home equity, I can count on my wealth increasing by a faster rate than home equity, which traditionally has only kept up with inflation (at least in rational parts of the Canadian real estate market).

Essentially, home equity is a really crummy asset. But you already knew that, because I told you so. And you all listen to me, except for the haters. THEY’RE ALWAYS GOING TO HATE, AREN’T THEY TAYLOR?

online haters

Is she wearing a bandaid?

Anyhoo, basically my attitude about home ownership could be summed up like this. I liked the idea of owning a house, but unless I could find a house at a reasonable price that checked off all my boxes, I was content renting.

You can probably guess what happened next. Behold, my new house.

The picture is already at the top, dummy.

Oh.

Yeah.

Do you think it would be too much to ask the nice people to scroll up and have a look?

They’re already doing you a favor by reading this crap. Do you really want to subject them to more work?

The story

When we looked at houses a little over a year ago, I told the Realtor what we were looking for. It was for a very specific type of house in a very specific neighborhood. Because hey, if you’re going to be patient, you might as well wait for what you want. Naturally, when such a house came on the market, the Realtor gave us a call.

Ha ha just kidding. You know, for their job being all about sales, collectively Realtors are really bad at calling clients.

We heard about it from a neighbor who’s a friend of mine. From his vantage point of across the street, he watched for months as this place was rebuilt from almost the ground up. It turns out the previous owner was a hoarder (YES!) who had a lot of cats in there (DOUBLE YES!). The cat piss damaged the walls and floor, which were replaced along with most everything else.

The only thing this story is missing is knocking out a wall so the fat guy who doesn’t fit through the door can go to the hospital.

Once the sign went up, he gave me a call and told me the story.

The sale was being handled by a family member of the aforementioned hoarder who wanted the property gone quickly. So it was listed at under $200,000, which is a steal for that neighborhood. Crummy houses with no work done whatsoever to them regularly sell for more than $200,000 in that part of town.

The other thing we had going for us is there were no inside pictures of the place. It looks good from the outside, but nothing compared to the interior, which is brand new. This probably helped limit the amount of interest in the place.

And, to the honest, I’d bet the realtor who had it listed was trying to keep it on the down low to try and double end the listing.

We phoned our Realtor and got in to see it that night, spending a good hour there inspecting the place from top to bottom. I couldn’t believe how good of condition it was in. Not only had they done a nice job with the renos, but stuff like the foundation was also in great shape. It’s a 50 year old house and I could only see a couple of very minor cracks in the foundation. It was amazing.

After inspecting this house, we figured out pretty quickly it would be a hot commodity. The next morning we put an offer in and a few hours later it was ours. I won’t say much about the offer because I’m going to write about it more extensively in the future, but I will say we were in a multiple offer situation.

Yeah. Not only did I buy a house, but I had to compete with someone to do so. I pretty much broke all my rules. FINALLY, FINANCIAL UPROAR BREAKS THE RULES AND EMBRACES A DEVIL MAY CARE ATTITUDE.

How I made $30,000

This one is simple. Basically we bought a place worth $225,000 for $195,000.

That’s not just our wishful thinking either. Not only did two other Realtors confirm the value, but so did all of the comparable sales in the area. There was a reason why we jumped on the place within a day of the for sale sign going up on the lawn.

We did contemplate continuing to rent while trying to resell the place in a year or two (after putting in a renter and collecting that cash flow), but we decided not to.

Mortgage strategy

Ideally, my strategy will be as simple as possible. Since mortgage money is so cheap, the mortgage will be the last debt I pay off.

I say ideally because as it stands today, I’m finding it harder and harder to find attractive stocks. Valuations are just too high. I find myself more inclined to sell some of my winners rather than looking at buying stuff. So I may take some capital I have in a taxable brokerage account and put it on the mortgage.

Monthly payments

I chose a monthly mortgage payment of $700 per month, which extends us just past the 25-year amortization mark. This is easy to do if you have a decent sized down payment.

Our total monthly costs go as follows:

Mortgage: $700
Utilities (internet, water, power, heat): $450
Insurance: $80
Taxes: $150

I’m including nothing for maintenance for the time being since just about everything inside the house is new. The roof and exterior walls are new as well. I know I’ll pay for maintenance eventually. I just think I can avoid it for the time being.

The total costs work out to $1,380 per month, a savings of $170 per month compared to renting. But, again, most of that savings will eventually get eaten up by replacing appliances or a furnace or building sex dungeons or whatever it is you owners have to worry about.

Am I worried about Canada’s housing bubble? 

Nah.

Look, if I was buying in Toronto, or Vancouver, or even Calgary, I’d probably be worried about values. At least two of those three markets are nuts, with the other still pretty overvalued. Plus I’d be shelling out at least half a million for a nice place that isn’t a condo. At least my house has land.

But I live in a small town where it’s possible to buy a nice place for under $200,000. This is approximately 3x the average family income in town. It’s a pretty reasonable valuation in a world where interest rates are below 3%.

Stop rambling already

So yeah. We put $30,000 in our pocket as well as creating a little extra cash flow in the meantime. I’m quite okay with our decision to buy even if such a thing isn’t en vogue today. Go ahead and yell at me in the commenters, renters for lyfe.

The Future of The Canadian Payday Loan Industry

The Future of The Canadian Payday Loan Industry

Since we’ve already established only a monkey-brained maroon would ever resort to taking out a payday loan, we only have to spend one sentence explaining how bad they are. Hooray for efficiency!

It isn’t just the PF world that thinks these loans are garbage. Governments across Canada are starting no notice and actually do something about the payday loan industry.

In Ontario, the maximum a lender can charge for a payday loan is 21% interest. So if you borrow $300 for a hooker $600 for two hookers (Hey, if you’re going to get a hooker, you might as well get two. It’s double the fun!), the maximum charged will be $126. This includes any extra fees that might be charged by the lender.

In other words, a lender can’t charge you 21% interest and then a $10 leaving town tax. Not that such a tax exists, but hey. You can’t put anything past those evil payday lenders.

Finally, folks doing these kinds of loans in Ontario have to have a license. As part of keeping that license, they have to do things like plainly point out how much the loan will cost and give a borrower two business days to cancel a loan without having to pay a penalty.

Ontario isn’t the only province to make changes. B.C. capped the interest rate at 23% and forbade payday lenders from lending more than 50% of a borrower’s take-home pay.

Alberta recently introduced a bill that would cap the rate allowed to 15%, the lowest in Canada.

Saskatchewan has similar rules as B.C., with each individual location being charged a one-time $2,000 licensing fee.

Manitoba is almost as strict as Alberta, with the rate maxing out at 17%. The province limits borrowers to only borrowing 30% of their monthly net pay. Also, if a borrower extends their payday loan within seven days of getting it, the maximum charged can only be an additional 5%.

And finally, there’s Quebec, where payday loans don’t exist. That’s because the province has set the criminal rate of interest at a mere 30% annually. Compare that to Alberta, which still lets payday lenders charge 15% for two weeks. That works out to 390% annually.

So as you can see, Canada’s payday loan industry has changed drastically over the last few years. Legislation has been put in place to protect consumers at the expense of the payday loan providers.

Depending on who you believe, this is either the worst or greatest thing ever. Industry spokespeople say payday loans provide an important need to dirtbags under banked people. Consumer advocates say just about everything is better than a payday loan–even after all of these changes have been made to better protect the consumer.

The truth about the payday loan industry is probably somewhere in the middle. These changes will affect lenders, who will likely respond by moving more to an online-only model. Avoiding storefronts cuts down costs nicely. Fewer people in the business will mean more loans for the stores that do stick around. These stores will become more profitable.

And it will help borrowers. Dirtbag Jim will still get payday loans. He’ll just pay slightly less for them.

But ultimately, I think it affects the industry in a much bigger way. Here’s how.

Enter the title loan

Traditionally, payday loans have been exempt from usury laws. This limits the interest rate charged to consumers at 60% annually–at least outside of Quebec. And you thought a 24% credit card was bad.

Although the payday loan industry been affected by all sorts of legislation, there has been very little change to more traditional loans.

So what separates a payday loan from a more traditional loan without any collateral. A few things, namely:

  • The amount of time it takes to pay back (longer than two pay periods)
  • The interest rate (cannot exceed 60% annually)
  • Security (can be anything, while payday loans can’t legally lien anything

Let’s look at two real life examples. Say you get a $1,000 payday loan in Alberta, which would cost you 15%. Or, you get a $1,000 loan from Easy Financial which charges 46% (and change!) per year. The payday loan gives you two weeks to pay it back. The Easy Financial loan gives you three months.

You’d get charged $150 from a payday loan shop and (approximately) $100 from Easy Financial. But since the Easy Financial loan takes three months to pay back, it works out to a much lower cost per day the cash is borrowed.

The big reason why payday loans and unsecured loans from Easy Financial charge so much is there’s no collateral. Making loans to people with zero assets is risky. If they weren’t such terrible credit risks, they’d have assets. This relationship is the basis of banking.

99% of the people using payday loan places don’t have houses, securities, or other good sources of collateral. But they do tend to have something that does have value–a car.

Cars aren’t great pieces of collateral. You can literally drive them away. They tend to go down in value over time. And you’re only one bad texting while driving decision away from totaling the thing.

So it’s obvious that struggling borrowers shouldn’t be able to put their car up for collateral and get a loan at 5% annually. But they should be able to do better than 46% a year.

Plus, legislation really doesn’t touch the auto lending business. Sure, there are certain rules you have to follow as a lender, but they’re nowhere nearly as onerous as the ones governing payday loans. The payday loan industry gets all the attention. Nobody cares about title loans.

Title loans are easier for the lender and they give the borrower a lower rate. Us PF nerds scoff at a title loan at between 24% and 30% interest a year, but that’s a full 92% lower than what Alberta charges for a payday loan.

The cost of borrowing for the lowest rungs of society is coming down, and that’s a good thing. Title loans will help that continue to happen. Look for them to replace payday loans more and more in the future. Payday loans will never entirely go away, but look for the payday loan industry to start shifting towards more of a title loan model.

Maybe We’re Looking at Canada’s Debt “Problem” All Wrong

Canada is currently in the midst of a gigantic debt problem, at least according to personal finance nerds and other general non-YOLO types. Do I even need to point out these same people also hate 99.2% of fun?

Budgets are fun! they say, lying worse than Bill Clinton about that time he gave it to a unnamed secretary in the kitchen of the White House. TOPICAL.

According to the latest numbers I could find after 6.3 seconds of Googling (or, as we in the Financial Uproar editorial department call it, PAINSTAKING RESEARCH), Statistics Canada says at the end of 2015, our collective debt-to-disposable income ratio grew once again, increasing to 165.4% compared to 164.5% the quarter before.

This means that for every dollar in disposable income–which is gross income minus taxes, CPP and EI contributions, and any other mandatory deductions–the average Canadian owes $1.65. That’s up approximately 65% since 1998, when the percentage owed first hit 100% of disposable income.

This trend is concerning for a number of reasons. Pro-equality folks say the increase in debt is caused by bigger problems, namely the ever-growing gap between the rich and the rest of us poor schmucks. The so-called 99% is poorer than ever, they assert, because incomes for average folks have barely stayed pace with inflation.

Housing bears think our growing debt load is going to eventually cause the mother of all housing collapses. All that’s needed is a few rate hikes or a huge wave of unemployment or some other bad thing and it’ll cause the whole house of cards to finally collapse. Try to resist the urge to punch these folks when they all but gloat when you lose your house and possibly your dog.

And even if the housing market manages to have the so-called “soft landing” we all fantasize about, most financial crises happen because of debt. The last one in the United States was caused by mortgage debt. Other ones happened because of Russian debt or Argentinian debt or Southeast Asia debt.

So, yeah, it’s pretty easy to say debt is a bigger problem than that time I got my head stuck between stair railings. Pro tip: BUTTER DOESN’T WORK.

Personal finance folks think there’s one and only one solution to this problem–you pay down your debt, stupid. For the most part, they’re collectively okay with folks financing stuff like an education, car, or house, but draw the line at expensive consumer debt.

Some are so anti-debt they insist on paying for everything with cash, including the inevitable time when they decide to buy a house.

The world gets divided into two camps. The first is the regular guy who wants to have the nice things he sees everyone else enjoy. Instead of saving up for said thing, he finds somebody to finance it. For a reasonable interest rate, he gets to enjoy a car/education/whatever without the associated pain of saving up for it.

The second camp is the one who thinks you should save up for stuff before you buy it.

In our world, the first camp gets crapped on a lot while the second camp gets praised harder than a dog when it finally pisses outside. We all agree minimizing debt is a good thing.

But the more I think about it, the more I think the folks leveraging up their own balance sheets aren’t nearly as dumb or shortsighted as we think. Here’s why.

A great time to consume

One word can be used to describe Canada’s economy since the ol’ 2008-09 meltdown.

Craptacular.

I was going to go with tepid.

Look at you, smart writer guy.

Shut up.

NOW WHO’S IMMATURE.

Because the economy still isn’t great, interest rates have stayed low. They’ve bounced around a little bit, before falling to the point where a five-year fixed mortgage can be had for under 2.5%. That’s pretty low, and I barely know how to count.

When rates are low, folks are encouraged to borrow. That’s the whole point of lowering rates in the first place. Low rates help to make things more affordable which then encourages people to consume. This new consumption hopefully stimulates the economy.

In short, shouldn’t we expect people to increasing their borrowing during times of low rates?

Canada’s debt-to-disposable income ratio has been steadily increasing over the last three decades as interest rates have fallen. If you look at both graphs there’s definitely some major correlation. So, yes, debt is going up. But it’s became steadily easier to service that debt.

Let’s look at an example. Say you made $60,000 in 1998 and 2016, ignoring inflation. After taxes your disposable income is say $30,000. Back in 1998 say you could borrow money at 8% compared to 3% today.

So in 1998 you’d borrow 100% of your disposable income of $30,000 for a debt of $30,000. At 8% annually you’d be on the hook for $2,400 per year in interest.

In 2016 you’d borrow 165% of your disposable income of $30,000 for a debt of $49,500. At 3% annually you’d be on the hook for $1,485 per year in interest.

So even though the amount owing is 65% more, interest payments are still 38% lower.

Say both people paid $300 per month towards their debt. 1998 guy would take 165 months to pay back his loan (13.75 years) while 2016 guy would take 213 months, a full four years longer.

But when we look at total interest paid, a different picture emerges. 2016 guy pays $14,405.24 in interest to pay off his outrageously long loan. 1998 guy actually ends up paying far more in interest, paying $19,602.39, even though his loan is shorter.

The point is simple. Low interest rates pay off for people who are in debt longer.

Penalties for abusing credit

This brings me to another point. I firmly believe the penalties for abusing credit are, at worst, merely an annoyance.

As we all know, borrowers have a few actions they can take if they take out too much debt. They can call the creditor directly and negotiate. They can keep up payments just enough to ensure a lender doesn’t take them to court. Or, if things get too bad, they can always declare bankruptcy.

Let’s focus on the bankruptcy part. Without going into too much detail, here’s what happens.

  • You list your creditors to your bankruptcy trustee. Unsecured creditors get nothing unless there are assets left over
  • Secured creditors who have collateral are usually not listed in the bankruptcy case. If they are, usually they just get their security back.
  • A certain amount of home equity is exempt from the process (in Alberta it’s $40k)
  • Your credit is ruined

As I’ve argued more times than I can count, I believe it’s very possible to live a life without credit.

Look at it this way. What’s stopping you from getting a big car loan and about six different credit cards and then declaring bankruptcy after charging them up? All you’d need to do is exclude the car loan from the bankruptcy and that’s it. You’re in business.

You can live life without credit. You’ll pay a little higher rates for car insurance or whatever, but that’s not the end of the world. You can get around the whole not having a credit card thing by signing up for your bank’s secured Visa.

So what’s your punishment for abusing credit? Worst case scenario is bankruptcy which is annoying, but isn’t the end of the world.

Prevalence of credit

In 2016 it’s easier to get credit than ever.

Need a new credit card? No problem. There are 10-15 major credit card issuers in Canada and probably about 50 minor ones. I’m sure one will be happy to give you a card to spend on smokes and hookers.

Need a mortgage? There are hundreds of different banks, credit unions, and non-bank mortgage companies all competing for your business. And if they all say no, you can always go to the world of private lenders.

Need a car loan? My experience in the industry says that Ford, GM, or Crysler’s credit divisions say yes to just about everyone. It’s only a matter of the rate you pay.

Have too much credit card debt? No problem. Places like Grouplend (now called Grow) or Borrowell will do a debt consolidation loan for just about anyone with a heartbeat and a half decent credit score.

If you’re looking to buy some sort of big ticket item, it’s almost a guarantee the business selling it to you either has its own financing program or one backed by a big finance company. And if that loan doesn’t do it for you, shop around. Trust me, you can find someone to lend you the cash.

In short, if you can finance it, chances are there’s a company that specializes in lending against it. It used to be hard to get a loan. With so much competition out there, it’s far easier now.

Put it all together

Let’s combine all our previous points together. Today you have:

  • Record low interest rates
  • Easy to get credit
  • Lots of available money
  • Relatively minor penalties for those who abuse debt

It’s pretty much the perfect storm for people who want to borrow money.

All borrowing does is enables consumption today in exchange for paying more for it down the road. The cost of this is less than ever while you could argue the benefits are as great if not greater than they were years ago.

You used to be able to get a nice union job without a college education. Those are few and far between these days. You used to be able to buy a nice place for between two and three years gross income. That doesn’t happen today unless you choose to settle down in a place with a population less than four figures. And so on.

When interest rates go down, the rewards for waiting become less and less enticing. It’s almost impossible to get more than 2% annually on your money without taking risk. This isn’t a world that rewards savers.

Basically, by borrowing more when rates go down, people are reacting exactly how we should expect them to. We encourage companies to borrow more when rates are low, even to do something as mundane as buying back stock. Why shouldn’t we encourage similarly rational individuals to do the same?

Ultimately, debt is a personal finance sin. But in 2016, the reward for delaying consumption is as small as it’s ever been. Keep that in mind before criticizing your friend who’s financed to the hilt.