Archive for February 2016

How we paid off $6,500 in credit card balance in 3 months using one simple trick

There seems to be so many different creative approaches that people follow in order to pay off their credit card balance. We decided to come up with

$6,500 in credit card balance paid off in 3 months: using one simple strategy

$6,500 in credit card balance paid off in 3 months: using one simple strategy

our own in order to eliminate $6,500 in credit card balance. To begin with, it is not that we weren’t already making payments to reduce and even eliminate our balance. We were. In fact, we were often making hundreds of dollars in payments every month if not in the thousands. Problem was 2015 was unlike any other year. It was full of weddings and other family social events that cost us money. Then we had the biggest event of the year and our life: having our first baby and you know they don’t come cheap these days! And if these two things weren’t enough, of course, as a result of having the baby, my wife was on mat leave which meant she only got about 55% of her income. The government did start paying us a monthly benefit for our baby but we had decided that we wouldn’t spend any of it. Each and every cent since his first payment has gone towards an RESP account (and so has every dollar that relatives and friends gave us as gifts for his birth and baptism)

Needless to say, it was a year in which our expenses matched, and even exceeded our income, given all these things we had to deal with. By late September, I was growing tired with paying so much towards our credit card, yet we were barely making a dent into it. As I told my wife, we were taking one step forward, two steps backward.  For example, if we paid $300 towards the balance on Monday, something would come up on Tuesday and had to pay $400 for something or more than one thing (buying something for the baby, a bill that was due etc.) We had to do something about it. By October 1st, the balance was $6500, and we decided that we had to pay the full balance by Dec 31st, or just over $2150 per month. If Dec 31 was here and there was still a balance, we would use money from our savings to pay it off. The idea was that this would force us to pay as much as we can so we don’t have to take from our savings. It would also discourage us from putting any non-necessary expenses or spending on the card. As part of the plan, we also decided to stop putting any money into our savings account and direct it towards paying off the credit card instead. It didn’t make sense to put money in a saving account that pays less than 1% in interest while having a big credit card balance that charges us close to 20% in interest. This redirecting of money that would otherwise go towards saving to pay off the credit card balance, meant that we were now paying double what we were paying in the past.

And there you have it.  All it took was a commitment. But wait, there is more to it. A commitment alone is not enough, unless someone is very strong willed. As part of the commitment, I designed a simple spreadsheet (called it ‘VISA Repayment Plan’) to track our payment progress, starting from the first and middle of each month (i.e October 1st , October 15, Nov 1, Nov 15, Dec 1, Dec 15, and Dec 31) On each one of these dates, we would update our balance and beside it, we would put an arrow: up, down or no change, indicating how much our balance had changed from the previous month. It is amazing what a powerful and magical impact that one sheet of paper had!  We attached it to our bathroom door, so it was always in plain sight, thus reminding us of the task at hand. Just before Dec 31, our balance had been reduced to less than $1000 which we used our savings to pay off! So all in all, with little help from our savings, we managed to pay off $6500 in credit card balance in exactly 3 months. All in a year in which money was tight. As you can see, the main point here is commitment: if you have one, coupled with a clear timeline, and you stick to it, you will achieve your goal. You can apply this same principle to other objectives in your life such as ‘weight loss’ , ‘saving money’ etc.

The one letter that confuses so many about TFSA and how to use them properly.

Do you know what TFSA stands for? ‘Tax Free Saving Account’ you say? you got it!

But do you know what that means exactly? well most people think they know, when in fact they don’t.

TFSAs are not only for saving but investing and trading as well

TFSAs are not only for saving but investing and trading as well

Why? the simple inclusion of the letter ‘S’ or the word ‘Savings’ throws people off. People assume and treat TFSAs as a saving account and nothing else. The fact of the matter is, a TFSA can be used in a number of ways to generate, save or invest your money.  For example, any of the following would be technically correct:

TFTA: Tax Free Trading Account

TFIA: Tax Free Investment Account

TFSA: Tax Free Saving Account

TFGA: Tax Free Growth Account

TFA: Tax Free Account

As you can see, you can do all of the above with a TFSA account, be it to grow, save, invest, trade or simply use it as a bank account to deposit and spend your money though this wouldn’t be the best way to use it! The only limitation of a TFSA is that it has an annual limit (for this year it is back to $5,500, after rising to $10,000 for 2015) as well as the fact that any money you gain within a TFSA is not taxable. Of course, there is more things to know about TFSAs, but that is beyond the scope or purpose of this article. The point is, the words ‘Tax Free’ is all that matters in a TFSA. Which is why the word ‘Saving’ in TFSA confuses a lot of people. They think TFSAs are for saving only. While they can certainly be used for that, it is one of number of things we can use TFSAs for.

 

Trading and Investing

So many people are not aware of this but you can use a TFSA account to trade and invest in stocks, bonds, ETFs etc. In fact, it is one great way to generate money and not have to give anything back to the government in the form of taxes. Let me explain with an example. Let us assume you are a couple and together, through 2016, have a combined lifetime contribution room of $93,000. Let us further assume that you have accumulated $90,000 in TFSA. You can basically use that $90K to trade and invest and not have to pay tax on the money generated from stock appreciation or any capital gains.  Let me use another more specific example. Let us say you use your $90K to buy 3 different stocks, which yield an average of 4.5% in dividends. For the entire year, you will get well over $4,000 in dividend income alone. Thanks to this being done within a TFSA, you won’t have to pay any taxes on this $4,000 that you earned in dividends. If this was a regular account, you would have to pay taxes on this $4,000 in dividends.

The other problem people have, once they are aware of the fact you can use it for trading and investing, is how to do that? Most discount brokers and trading firms allow you to open a TFSA account and trade within it. For example, with RBC Direct Investing-the platform I use-when you open an account, you will have the choice of opening a regular account, TFSA, RRSP etc. In fact, I don’t know why anyone would not use a TFSA account to trade and invest, assuming you have the room to contribute. Using a TFSA for saving purposes should be secondary, unless you don’t like to take any risks and don’t know anything about investing and trading.

So go ahead and make use of your TFSA if you never had before. It will not only save you in taxes, it will allow you to make money.