Daily Starbucks is not Good for My Bank Account
Over the last week I have joined my co-workers at Starbucks for coffee on a daily basis. Normally I don’t order anything, but I decided to try some of their specialized caffeinated beverages.
I quite enjoyed the Carmel Brulee Lattes and the Skinny Vanilla Lattes. So much in fact that I ordered Ventis. That is the special Starbucks name for extra large or shall I say, extra expensive. The drinks I had were between $5.09 abd $5.41. Ouch!
Looking back at the week I had a coffee every day and one day I had 2. That is over $30 last week for coffee. Although the “special” coffee was tasty, this trend will not continue. I may indulge once a week, but that will be it. $30 on coffee in a week is ridiculous.
Prepay Your Mortgage – It is good for your financial health.
I have been an advocate for prepaying your mortgage rather than investing for a few years now. One of the main reasons for this is it the best guaranteed after tax, risk free return you will achieve is paying down your mortgage.
A recent report by the Certified General Accountants Association of Canada reaffirms this and goes into a little more detail.
Please keep in mind that everyone has unique circumstances where prepaying their mortgage may not be their best option. One such situation is employer matched RRSP contributions. If your employer is matching you dollar for dollar it will be impossible to beat an immediate 100% return on your investment.
DIY for Big Savings
A few months ago I took my 2002 truck to a the dealership for a minor recall. When I booked they offered me an oil change and a 60 point inspection for $60. Normally I take my vehicle to a mechanic who works out of his garage. He spent 25 years working at a dealership so I trust him explicitly. The inspection revealed that I needed over $3,000 of work done to my vehicle. I was shocked and not very happy. Naturally they wanted to book me in right away but I wanted my mechanic to look at their list. He checked the list and changed one seal for a total of $120. That was work that needed to be done. The rest of the recommended work was unnecessary and just recommended to boost profits. One of the items recommended was a wheel alignment. I found this odd as the tires had been replaced a few months ago and showed no wear. The vehicle has never pulled to either side. I called the dealership back and asked if the inspection I paid for included a road test. The service rep stated that it was just a visual inspection done in the garage.
I swore off dealerships for any minor things that went wrong on that day. Low and behold, 5 months later my heat and air conditioning stopped working. Nothing was coming out of the vents. This was a bad time of the year for this as I needed heat in the mornings and air conditioning in the afternoons.
I started out of my quest to do it myself and naturally I went right to Google. There was a lot of information to take in and I determined that the blower motor needed to be replaced. I found an awesome resource for my vehicle at . Not even knowing where the blower motor was located I went down to a local parts store. The staff there was awesome, telling me where it was and giving me some tips before I even purchased a new one.
I took their advice and gave it a couple of good wacks to see if that would get it going again and it didn't. I removed the blower motor in anticipation of purchasing a new one. As I was working on my truck my neighbour popped over to chat and see what I was doing. He is a handy type guy and offered to check and see if power was getting to the blower motor. He was able to determine that the blower motor was not getting power. The next day I returned to the parts store and purchase a fuse and a switch for for approximately $14. I also picked up at tester for $7 so I could test power myself. Low and behold replacing $14 worth of parts fixed the problem. I had heat and air conditioning again.
Although I am far from being "mechanical" before I take my vehicle in for any issues I am having I will do a little research and have it checked out by a "non-dealership." I am guessing I will save hundreds of dollars.
Mortgage Rate Game
Banks like to play what I call the Rate Game. Banks have a posted rate, various other advertised and special rates. I use the Alberta Treasury Branch as an example, but all banks play the Mortgage Rate Game. As of today has a posted 5 year fixed rate of 5.59%, an extreme discount rate of 4.19% and are advertising 4.39% at one of their branches. On top of this is extra discretion at the branches for lower rate. This is very confusing for the average consumer.
When shopping for a mortgage you have do to your due negligence. While 4.19% is a competitive rate 3.89% is readily available right now. No doing your due diligence can cost you, but how much? The following compares the total interest paid on a $300,000 mortgage over a 35 year term with the difference fixed rates. All calculations are made with the same monthly mortgage payment amount to eliminate any time value of money issues.
5.59% - $378,788
4.39% - $191,145
4.19% - $181,151
3.89% - $157,386
As you can see a small difference in the rate over the life of a mortgage can cost you tens of thousands of dollars.
How do you avoid playing the rate game? Call your bank and ask for their "best rate." Then do some research online and talk to a mortgage broker and let them find you their best rate. Whether you use your bank or a mortgage broker ensure that the mortgage has features that meet your current and future needs. I will have an article on this in the near future.
Pay off Your Mortgage Faster with a Money Merge Account
Although we were making good progress on having our mortgage paid off in 5 years by making extra payments I, wanted to pursue something further to enhance the process. We decided to take advantage of a Money Merge Account. There are different variations of how this can be set up, I will explain what we have done.
I want to caution you that you do not need to purchase any software to set up this process and most of the time this software will not pay down your debt as efficiently as possible and may hurt your progress in the long run.
For nearly two years we have been making mortgage prepayments when we have had excess cash in our bank accounts. This made an incredible difference in the projected interest we would pay and the balance itself. Our mortgage balance was approximately $239K after 22 months of prepayments. If we did not make any prepayments our balance would be approximately $311K. Our prepayments made a huge difference.
Every month for the past 22 months we would sit down and work out an amount we were able to prepay against the mortgage. We had to keep track of when money was coming in and when bills had to be paid in order to prepay the right amount without going into overdraft. Although it was very effective it was not the most efficient way to use our time.
We were able to hit a "sweet spot" when rates were increasing and refinanced our mortgage. The penalty and legal fees were absorbed by the interest savings so we switched to National Bank's "All in One Mortgage". In my opinion, this is the perfect mortgage product. It enables you to separate the line of credit portion into different sub accounts and use each as a chequing account. All of our income goes into one account and all of our bills come out of it. The line of credit is re-advance-able. When we make a mortgage payment the principle portion becomes available in the line of credit. The beauty of this is we no longer have to plan around our income and expenses. The money is always available.
Currently we are set up like this, $310K All In One Limit, -$189K in a fixed portion at 3.65%, -$43,726.62 in our main line of credit account which receives all of our income and pays all of our bills at 3.1%, -$832.25 in a second line of credit account to cash dam our rental property (explanation post to follow) at 3.1% and $86,441.13 available overall in the lines of credit.
The goal is to not have any money idly sitting around but have every penny we bring in offset mortgage interest. The interest rate on the line of credit accounts will fluctuate with the Prime Rate. As it increases we will pay down our main line of credit account so when our line of credit interest rate is above our mortgage rate at 3.65% we will no longer carry a balance. It would be ideal to have that account always at a $0.00 balance but with income and bills coming in and out that is not practical. The balance will likely fluctuate $1,000 either way.
This account has allowed us to use our money to offset as much interest as possible and has simplified our financial lives. All of our bills, utility, credit cards, taxes, phone, etc are automatically debited from our line of credit account. Well, all except for the AMEX, they won't do direct debit without a personalized void cheque. We will work on that later. We no longer have to sit down and work things out on a monthly basis. Our finances are fully automated!
Our total debt currently is $233,558.12 which must decrease by $6312 a month in order to be debt free by July 2013 which is the goal. Although that is a lofty goal, we are waiting for the proceeds from the sale of one rental property and may sell the other next year if the tenants do not want to stay.
The only possible down fall with this is not properly managing our spending. We will have to monitor it and keep it in check. That is after our tropical vacation.