Today’s post is going to be short and sweet. When making financial decisions, take a look at the long term view first.
Most people go through a life path where they start their careers, progress with their careers, buy a house, maybe have kids, pay off all debts, save for retirement and eventually retire.
The biggest expense areas can be grouped into the following:
Living (basically any other spending).
One of the problems that I see with some people is that they spend too much money on living and not enough on retirement savings and paying down debt.
If you are a person who makes the minimum payment on your debts (including mortgage), doesn’t save much for retirement and only saves for things like vacations – you are headed for a bit of a crash at retirement time.
One of the biggest problems with an “I’m not saving for retirement” strategy is that the strategy will work exceedingly well for a long time. You’ll have a great life and won’t have any money worries assuming you can balance your budget. The problem is that once you retire, you’ll have to adjust from living the high life to living in near poverty.
If you are middle class or higher, you need to save for retirement in order keep some sort of decent living standard in retirement.
Cut expenses, save for retirement
If you are young (less than 30), then I wouldn’t be concerned with retirement savings. If you are over 30, you need to start thinking about saving for retirement. Even if it’s not possible now – think about how to make it happen in the near future. The retirement savings money has to come out of your living budget category. Yes, that means you will have to cut back on your living expenses. You can decide which ones to cut.
Housing is a funny category. It’s common for people to buy an expensive house, but then only make the minimum mortgage payments for 30 years or even longer. It shouldn’t take 30 years to pay off a house, in fact it shouldn’t take more than 20 years in my opinion.
Make a plan to pay off your house in a reasonable amount of time. This extra money will come from your living category.
If you spend too much money on ‘living’ and aren’t putting enough money into future expenses like retirement – try to think ahead and how you would like your life to be. Do you want to be debt free someday? Do you want to retire early or work part time in your 50’s? Those things won’t happen by accident – you need to do some planning and some saving.
This post was part of the Blog for Financial Literacy effort organized by Glenn Cooke from LifeInsuranceCanada.com
A reader asked me how he can save $100,000 in order to do his MBA. My first thought was “with great difficulty”. $100 grand is a lot of cash to save even if you make a high salary.
Obviously, to save money you must spend less than you earn and save the difference. Cutting your spending and increasing your income are the two options you have.
I’m not going to get into money saving tips – there are a million…no, perhaps even a billion blogs out there dedicated to that sort of thing already. I will say however, that saving money is 99% motivation. If you are keen to save money for a desired goal and have the financial capacity to do so, then you will do it.
If you need someone to explain obvious money saving strategies like cooking and eating at home is cheaper than eating out, then trust me – that MBA won’t do you a bit of good. Just keep eating out and enjoy your life.
Increasing your income by working extra hours or from a part-time job is another possibility, but it might not be practical for everyone.
Save or borrow for an MBA?
I think the reader should consider borrowing money to do the MBA.
Most people complete an MBA in order to increase their earning potential. They might spout some other nonsense about their intentions, but they are lying. It’s all about the money!
Assuming an MBA increases your future earnings, waiting to save up for an MBA means that there will be fewer post-MBA higher-earning years. If you borrow money and complete an MBA now, you can start earning the big MBA salary earlier and there will be more years with the extra income.
For example if the reader is 30 years old and takes 10 years to save up $100,000 to get the MBA, he will be 40 before he starts making big MBA money. Assuming he retires at 65, that gives him 25 years of post-MBA higher salary earnings.
But what if he borrows the money at age 30 and goes the MBA now? If he starts the post-MBA salary bump at age 31, that gives him 34 years where he is earning a higher MBA salary.
That extra nine years of increased earnings adds up – even if the post-MBA salary bump isn’t that large.
If your salary increases after the MBA, that will make the $100,000 loan easier to pay back.
And yes, this argument can also be applied to any post-secondary education which is why it can make a lot of sense for students to borrow in order to complete a degree or other training if it increases their future earning potential.
What if my post-MBA salary doesn’t increase?
If you spend a $100,000 on an MBA and end up going back to your old job – needless, to say you probably wasted your money. Not everyone benefits from an MBA.
It’s important to be able to pay back your MBA student loan, even if your salary doesn’t increase. To do this, you have to look at your current pre-MBA income and determine if that is possible. If not, you might want to consider saving up part of the MBA cost first and then borrow the remainder in order to reduce your risk.
$100,000 is a lot of money to save and it would take most people a long time.
If you want to invest in post-secondary education (ie MBA) to increase your future earnings, consider borrowing the money you need unless you can come up with the cash in a reasonable amount of time.
Make sure that whatever education you choose has a reasonable chance at a payoff. Even MBAs don’t pay off for everyone.
A friend of mine eliminated his mortgage a couple of years ago at age 35 and planned to save a good portion of the resulting extra cash flow. So far he has just spent the extra money, even though he knows he should be saving more.
My wife and I had a big goal to pay our mortgage off, something we’d been working on for several years. This was accomplished last year and we have seen the exact same spending pattern as my friend. I had hoped to channel a good portion of the extra cash to savings, but that hasn’t happened at all.
After a major goal is reached – what next?
One theory I have about this situation is that a mortgage or any other debt is a very concrete target and it is both easy and gratifying to measure progress. Financial goals like saving for retirement are far less concrete because there are so many uncertainties around retirement planning. If you increase your debt payments by $3,000 per year, you can measure to the second how much quicker you will be debt free.
If you increase your retirement savings by $3,000 per year – how will that affect your retirement? Obviously it will be better, but how much better? Will the difference be enough to be noticed? Is the increase in retirement lifestyle due to the $3,000 investment worth more than the decrease in your current lifestyle? I have no idea.
Pent up consumer demand
One problem with going hard on a debt repayment plan is that it usually means that you are delaying spending that will happen later on. House renos, consumer items you might want -it’s easy to say no when you are in debt-reduction mode, but it’s hard to keep sacrificing focus when the debt is gone.
Both my friend and I had very young kids during our major debt-reduction phase. For all the talk about how expensive kids are, we both found that young kids don’t cost much and prevent you from doing anything fun that costs money. I also found that having young kids is so tiring and time consuming that I never wanted to buy anything because it was too much work and I didn’t want to think about making choices or doing research.
Now that the kids are a bit older – our spending has changed as well:
More time to do stuff – I bought a road bike this year and enjoy a nice long ride every Sunday morning. This isn’t something I would have done a few years ago, because it is hard for one person to look after a newborn and a toddler at the same time.
More travel – We still tend to base most of our holidays around visiting the babysitters grandparents, but have branched out into camping and possibly the occasional hotel or cabin stay. I’d love to do another Germany trip in a few years, which will hopefully be more fun than the last one.
More eating out – I used to hate dining out with the kids. It was horrible and not worth the money. Now – it’s still not great, but I don’t mind as much so we do it more often.
Kids’ activities – Now the kids are getting involved with various activities which cost money and require equipment. It adds up.
Is it worthwhile paying debt off quickly?
The issue of pent up consumer demand leads me to question if it is worthwhile to totally deprive yourself in order to pay down debt very quickly. If all you are doing is delaying spending, then the advantages of paying off debt faster are not necessarily all that significant.
I think there is something to be said for balance. If you are doing a very hardcore debt reduction, then I don’t want to discourage you. However, slowing things down a bit might not be a bad idea. If you work too hard to pay down debts and then fall off the wagon – you might end up worse than if you had just started off with a more balanced approach to debt reduction and living your life.
I think we made a good choice to pay down our debt quickly, if nothing else we took advantage of the low spending years when the kids were young to attack the debt. But, I can see the argument that if we had taken another year or two to pay it off – the end result would be pretty much the same.
Set financial goals after debt payoff
Our next step will be to establish some financial goals. Hopefully that will get us to increase our savings rate at least a little bit. For now we have to pay for our new garage. Then I think contributing more to our TFSA accounts will be another goal. Lastly, our RESP account is not maxed out, so that will be another area we can put more money.
What do you think? Is it possible to pay off debts too fast?
Michael L has had a Canadian Tire Mastercard for some time. He was under the impression that it paid out one percent in rewards for non-Canadian Tire purchases. After doing some analysis on his Canadian Tire credit card statement, he concludes that his actual rewards are only about 0.86%.
With no help from Canadian Tire, he figures out that the “1% reward” is only calculated after following a rounding down formula as follows:
Less than $10 – Purchase amount rounded down to nearest dollar
$10 to $100 – Amounts rounded down to nearest $10.
Greater than $100 – Amounts rounded down to nearest $50.
Since there is absolutely zero information about the card or the rewards on the website, I called Canadian Tire financial services this week and the rep confirmed exactly what Michael had figured out.
With this rounding method, you can end up with odd situations like the following:
Someone making a single $135 purchase will get 0.74% in rewards.
Someone making three $45 purchases (totalling $135) will get 0.89% in rewards.
If you make 21 purchases all for $6.43 each (totalling $135) you will receive 0.93% in rewards.
I can understand that companies will favour in-store purchases with extra rewards and it’s very common for rewards cards to pay higher amounts for more use, but I can’t understand the logic behind this particular calculation.
It’s difficult enough to figure out the various rewards cards and determine which is the best for you without this kind of nonsense as well.
Most people who are interested in personal finance tend to be better at some areas than others.
In my case, I love reading about investing strategies, which include rebalancing methods – but I will often not bother rebalancing my own accounts for years at a time, which sometimes can be a drag on performance.
On the other hand, I’m pretty good at making contributions to said investment accounts.
If you have to choose between making larger contributions to an investment account or being an efficient rebalancer – I can tell you that larger contributions will make a far bigger positive difference than any rebalancing method.
I tend to focus more on items that make more of a difference, rather than somewhat mundane decisions about which rewards credit card pays out the highest return on gas purchases at a particular service station.
That said, sometimes you have to look at some personal finance basics and see if there is room for improvement. Making an extra $40 per year by switching credit cards doesn’t sound like a great deal to me – but over five to ten years, that difference will add up.
Our bunch of bank accounts
Right now, we have too many bank accounts and credit cards. Part of this is from a desire from my wife to have some of her own accounts in order to maintain a credit history. Fair enough.
I’m not interested in having five different rewards cards for different situations. Yes, you can certainly maximize your rewards by having multiple cards, but I just don’t have the time or the interest.
What I want is one rewards card/system and that is it. I want the single best card for our spending habits and I don’t care if it’s not the best card for any given spending category.
I just want one card.
Right now we do most of our spending on a CIBC Dividend VISA card which seems to have decent rewards of up to 1% cash back. I’m going to be looking at that card in more detail as well as for better alternatives, but that’s our card for now.
Our other “rewards card” is a PC Financial account that pays us grocery money (literally) for using the card at Loblaws.
What I want to do is analyze the PC Financial “grocery” rewards card and determine if it offers up enough rewards to justify having a separate account which needs to be topped up monthly.
Just to clarify – the PC Financial is an excellent no-fee bank account and the PC points are a nice bonus. In our case, we only have this account for the points, so I want to make sure the cash value of the points is high enough to make the separate account and card worthwhile.
PC Financial reward card Fees
There are no fees – easy enough.
How does the PC Financial reward card work?
It’s basically a no-fee bank account. If you use the PC bank card at stores that sell President’s Choice products, you can earn PC points which can be redeemed for groceries.
We do a lot of shopping at Loblaws, so we use this card a lot. PC points are worth one tenth of a cent each. So if you use the minimum allowable amount of PC points of 20,000, you will get $20.00 worth of groceries.
How do you get PC points?
There are a number of different ways to get PC points, but the only one relevant to me is the points you get from making purchases with the card.
You get five PC points for every dollar you spend on your bank card at participating stores where President’s Choice products are sold.
This is a bit disappointing as I can do the math in my head and determine that the PC points rewards are only worth 0.5% of your purchase amount. I had expected at least 1% to compete with the top reward credit cards.
In case you are wondering, we’ve been using this card for at least five years and this is the first time I’ve sat down to analyze the rewards benefit. 🙂 Oh well, this “mistake” has probably only cost us about $50 per year. Not exactly noticeable.
Ok, so this bank account is not very worthwhile for us and we will stop using it. I know the CIBC dividend card has better rewards and we can remove one bank account from our pile.
As mentioned, the PC Financial bank account is a great product if you are looking for a no-fee bank account. I’ve had a separate no-fee PC account for several years which was my unofficial “business” account and it has been great.
In our case, we were only using (or mis-using) it for the rewards, which by themselves are not good enough to justify having the extra account.
This post is long and a bit technical. To make things easier, I’m going to start off with the conclusion for the people who don’t read the entire post.
If you are traveling to another country and are planning to phone home on a smart phone using Skype in combination with a data roaming plan – I would suggest you reconsider. Skype is a bit of a data hog and your data charges will likely be higher than a reasonable long distance voice plan. Look into getting a long distance voice plan for your phone calls.
Monitor your data usage during your trip – make sure that the monitor you are using is real time (unlike the one I was using).
Another option which has been noted in the comments, is that you can change the SIM card in your phone and get much cheaper data rates that way. Rogers customers can unlock their phone for $50, but only if there phone is out of contract. Check with your carrier to see if this is an option for you.
On with the article
I recently spent a weekend in Chicago at a blogger conference. Before I left, I signed up for a U.S. data roaming plan from Rogers for my iPhone so that I could access the internet and not pay crazy roaming fees.
The regular roaming data charge is about $30 per megabyte (MB) of data, which is pretty easy to use by reading about three or four web pages, so a data plan is a must if you plan to be surfing the net at all.
The Rogers roaming data plan was $10 for one month plus $1 for every megabyte of data I used. This isn’t a great deal, but it’s a lot better than $30/MB of data used, which is what it costs without a data plan.
We left our kids at home with my Mom and needed to call at least once a day to say hello. My plan was to use Skype to make these calls. I have a Skype long distance plan on my phone already, so there would be no extra charge for making long distance calls.
I had estimated my data use at about 5 MB per day, based on my historical use and the fact that I wasn’t going to use the phone a lot while in Chicago.
The Rogers website has a data transfer monitor which I kept an eye on while in Chicago. My data usage seemed to be pretty minimal and ended up being 10 MB for the whole trip which was a bit lower than what I predicted.
I was pretty pleased with myself for taking the time to figure all this out and having a successful conclusion. But then I got the bill….
I was expecting to be charged about $10 for roaming data wireless use. In fact, the charge was $65.67!
After checking the bill details, the pricing and charges seemed to be in order – it was only the excessive amount of data usage that was the problem. The amount didn’t jive with Roger’s online data monitor or my surfing time.
It occurred to me that one difference from my normal iPhone web behaviour was the long distance Skype calls I had made. I suspected that this was the source of the extra data usage.
A regular web page might use up a quarter or a third of an MB of data when it is loaded onto your phone – but there should be minimal or no data transfer going on while you read the page.
I don’t know how much data is required for an internet voice call, but I suspect it is not a small amount and I do know that it is continuous, unlike reading web pages.
I decided to give my friends at Rogers a call and see if they could help me understand what happened and how to avoid the excessive data charges in the future.
What I wanted to know was:
Why did the online data monitor only show 10 MB of data used during the trip when it was actually 66 MB?
Do Skype calls use more data and if so, how much?
Because of past experience with bad reps, I have a rule that I always call Rogers at least twice. In this case, the first rep I talked to was completely useless, so I ended the call fairly quickly.
The second rep was ok. He wasn’t the sharpest knife in the drawer, but he did say that he didn’t think the online data monitor was reliable while in the States. This is something that hadn’t occurred to me – I had assumed their online monitor was real time.
I was then transferred to the tech department and talked to someone there who was very helpful. The tech guy confirmed that the online data monitor was a few days behind. This means it is ok for checking out your monthly data usage, but not for roaming data. It would be nice if Rogers could mention that fact on their website.
The tech guy gave me a great tip on how to monitor your data usage, which you can use on an iPhone. I suspect other smart phones have a similar feature.
The “Usage” screen indicates how much data you are sending sending and receiving in the Cellular Network Data Sent and Received lines. The numbers are in kilobytes or megabytes, so if you see “KB” after the number, divide by 1000 to get the approximate MBs used. Add both the Sent and Received values together to get the total.
Tech guy said that this screen should be very accurate. What you can do before a trip is to reset the statistics (“Reset statistics” option is at the bottom of the page), which will zero out the data usage numbers. You can now monitor your usage on the trip quite accurately.
How much data does a Skype phone call use?
None of the reps could shed any light on Skype call data rates, so I decided to do my own test.
I reset the data stats on my phone and then made a few timed phone calls. The results confirmed my suspicion that the Skype phone calls are data hogs.
The average data usage was 1.12 MB per minute which works out to $1.12 per minute.
I thought I was being smart by using Skype for my long distance calls instead of using an expensive long distance voice plan, but in fact the Skype calls were costing me over $1 per minute, which is far more than any long distance plan.
The other problem which I realized when I was writing this article is that in my mind, I wasn’t counting the Skype calls when estimating my data usage. Definitely a miscalculation.
How I will reduce roaming data charges in the future
Now that I’m older and wiser in the ways of international data transfer charges, I have a new set of suggestions about how to reduce your roaming charges.
Look at your regular data usage and estimate your usage while traveling. Try to consider differences in behaviour such as more long distance phone calls.
Research available plans with your carrier for data, voice, and text messaging.
Use WIFI wherever possible. Any internet usage (including Skype calls) will not cause any data transfer charges if you are connected to WIFI.
Use a long distance voice plan for any phone calls back home. At Rogers I could have signed up for a plan which costs $5 for a month plus $0.10 per minute. This is less than one tenth the cost of using Skype. Even if you have a cheaper data plan, using a long distance voice plan will guarantee the per minute cost, which is not the case with Skype.
If you want to make calls with the phone without internet – turn the roaming feature off.
Monitor your data usage during your trip. My regular web surfing used more data than I thought.
Try to limit use of the phone.
Leave the phone at home (I’ll never, ever do this).
How much data does regular surfing use?
I wanted to verify that my normal surfing wasn’t using a lot of data. To do this I did several tests where I reset the data usage stats, surfed for a while and then checked the stats to find out how much data was used.
Keep in mind that there are a lot of different variables which can affect data used for web surfing. Downloading videos and large files requires way more data transfer than a typical web page or email with no attachment.
The tests confirmed that for my regular surfing which consists of reading newspaper articles, some emails, Google Reader, Twitter and Facebook – I was typically using about 0.34 MB per minute or about $0.34 per minute of surfing. This is more than I had expected, so while my main problem in Chicago was the Skype calls – my regular surfing also cost more than I thought it would. Even if the Skype calls used the same rate of data as the web surfing, it still would have been far more expensive than a long distance voice plan.
Now I just have to remember all this stuff for the conference next year!
Mark from the Blunt Bean Counter challenged me to do the seven links project thing. Basically I have to pick the seven best posts on this blog in various categories. This is surprisingly hard, especially when you can’t remember half the posts you have written.
Most beautiful post
Dream Wedding – There aren’t many things of beauty on this blog, but Mr. Cheap’s extremely frugal wedding is one of my favourites. In an unrelated note, ladies – Mr. Cheap is still available!
Most popular post
RESP Contribution Rules – I was surprised at this one, but it has been around for about four years, so that helps the total numbers.
RESP Withdrawal Rules – RESP withdrawals have some expensive pitfalls, but not much has been written about them. I think this post helped a lot of people save money with their RESP withdrawals. Incidentally, I noticed a major site published an RESP withdrawal article lately which was clearly a rewrite of my post without any kind of credit to me. I’m debating whether to post a comparison so you can judge if I’m paranoid or not.
Will there be a second stimulus check in 2009? – This may seem like an odd post for this blog, but it’s the reason I’m still blogging today. I like to try to make money from the site and I’ve found that American topics are far more profitable. This post was my first big money maker. I still do American topics, but they are not visible to regular readers.
Part of this project is to nominate other bloggers which I’m too lazy to do. If you are a blogger and you want to write about this – go ahead.