Feel free to skip this one

This is going to be long, so feel free to skip the whole essay. Anyway, today I composed a financial tirade.

Here we go.

I'll start by saying that this is my understanding of the situation. This is not what I do for a living, so if I'm wrong feel free to point it out.

What happened in the US?
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We all know what a mortgage is - the bank lends a person/ business money to pay for real estate. The person borrowing the money pays it back according to the terms of the agreement. You can have a fixed rate mortgage for a period of time (say 5 years). The mortgage is typically amortized over a longer period of time (25 years), which means you would need several 5 year mortgages before the mortgage is paid off. You can also have a variable rate mortgage (where the mortgage rate fluctuates with interest rates.

In the US, banks started lending money for mortgages where the initial rate was low, but it skyrocketed to a high rate after a period of time. They were sold to consumers who were told that they could re-finance when the low rate expired. The "plan" was that when they re-financed, the price of the house would have gone up.

Housing prices started going down.

Let's say that you bought a house for $250,000 and put $10,000 down. You have a mortgage for $240,000.

Now let's say that house prices in your area dropped 10%. Your house is now worth $225,000. Since in the first years of a mortgage you pay mostly interest, you might have paid off $1000 of your mortgage.

So your house is worth $225,000, and you owe $239,000.

No bank is going to let you re-finance for $239,000, since that is more than your house is worth. That means you're stuck with your higher interest rate for your first mortgage.

A lot of people couldn't afford the higher interest rate (especially since fuel, and thus a lot of essential items like food, was going up at the same time), so the bank ended up foreclosing.

It gets worse.

Banks started to realize that loaning money that wasn't paid back was not, in fact, good business. As a result, they went the other way - they slashed credit card limits, and it was much harder to get a mortgage or other credit. This applied to both individuals and businesses.

A lot of people directly involved with mortgages & other financial services started to lose their jobs. Banks with more bad debt than they could handle started to go under.

Some unrelated businesses that needed short-term loans (for example, a store that has to pay for supplies a month before getting the money in for sales) were no longer able to get those loans. As a result, they started to close.

The situation gets worse when you consider how much of the world's economy is tied to the US economy (and how many other banks, etc. had invested in the sub-prime mortgages).

Obviously, the people losing their houses made bad financial decisions (committing to a contract based on the assumption that things will only get better). However, the banks bear a lot more responsibility for the situation - they took advantage of people's poor financial management, and, in some cases, lied on loan applications so that people would get approved for more money than they should have received.


What can I do to minimize the impact on me?
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There are good financial decisions that everyone should be making regardless of the economy.

1) Set up a plan to have money taken automatically from your bank account every month & put into a savings vehicle. You want to have some money set aside in something that gives you interest, but that you can use in case of emergencies. Set a minimum amount you want to have set aside for unexpected financial hits (like job loss, medical/dental bills, an unexpected major repair, etc). Once you are over that minimum, you can use the excess money for major purchases if necessary. Obviously, everyone has different levels of what they can afford to put aside every month, but the key is that you want to contribute regularly and you want the money to be available, but harder than normal to get at. (Perhaps that means you don't put it the account on your bank card, perhaps it means it's in a mutual fund where it takes a couple of days to get at.)

2) Understand the difference between needs and wants. You need medical & dental care. You do not need new clothes (assuming that you haven't had a fire or something - in that case new clothes would be a need). Cable, cell phones, restaurant meals, a gym membership are all wants. A vehicle (& its related costs) is a want if you live somewhere where you can get to work without it.

3) Do not carry a balance on a credit card unless it's for a short-term need. (If it's a long term need, you need to figure out how to pay it off regularly). A lot of people don't seem to know this, but when you put something on a credit card, you have around a month to pay it off without owing interest. If you don't pay it off, every purchase you make from then on (until your entire balance is paid off) will cost you interest immediately. So let's say you buy something for $200 on September 10. The bill is printed September 15, & the payment is due October 4. On September 18, you put another $200 on your card. If you don't pay off the first $200 by October 4, you will owe interest on all $400 (even though you haven't got the bill for the Sept. 18 purchase yet). And credit card interest rates are high. You don't want to get into that hole.

4) Look at where you're spending your money and figure out if you're spending your money to match your priorities. Wants don't go on the credit card unless you can pay them off. But let's say you can afford them - do you want to afford them, and do you want the level of service you're paying for? Do you need voicemail on your cell phone? Do you eat out several times a week, and, if so, what will you save by cutting that level in half? Do you watch a significant number of the channels you get?

5) Contribute to your retirement fund. In Canada, you don't pay taxes on the interest generated within your RRSP, and you get a tax deduction. No point in passing that up (unless you are contributing money that would otherwise be used to pay off high interest credit card debt).

Make sure you balance your investments - generally the closer you are to retirement, the less money you should have in stock-based funds - and diversify so that one company going under doesn't destroy your investments. If you're years away from retirement and you have a retirement plan, you probably lost a lot of money (on paper) in the last month or so. It's hard to contribute more money when you've just lost a lot as the markets fall, but that's where dollar cost averaging comes in.

Here's how it works.
Let's say you invest $100/month in a plan.
Month 1, plan shares are currently $100, so you get one share.
Month 2, shares are $50, so you get 2 shares.

What is the average cost of your shares in this plan? No, it's not $75 - it's actually $67 (i.e. $200/3 shares). Basically, as the price goes down, you will get more shares - which means that when prices eventually get better, you will be better off.

6) Mortgages. If you want to buy a house, that's great - but make sure you understand all of the real costs involved. If you buy a house, you will owe money on your mortgage, you will owe money for property taxes, and you are responsible for maintenance & repairs. You don't want to be in the position of owing more money than your house is worth. That means you need a down payment. If the rules haven't changed, in Canada you need a 25% down payment to avoid having to pay for CMHC insurance. (I think if you put down 10% you need less insurance than if your deposit is < 10%.)

Anyway, once you have determined you want to buy a house & you've figured out what your down payment will be, go to the bank and get pre-approved. The bank will tell you how much they'll lend you. You do not want to borrow as much as they'll give you.

Instead, figure out what you can afford in payments each month (or, ideally, every 2 weeks). Then figure out how much you can borrow to get your payments at that amount - and then borrow less than that.

Remember how I said that the first few years of a mortgage you're paying mostly interest? Let's say you can afford $500/month. If you borrow an amount that puts your payments at $500/month, you will be paying off mostly interest. However, if you borrow an amount that puts your payments at $400/month and then increase your payments to $500/month, you will be putting an extra $100/month directly on the principle. That may not sound like much, but that's money that you won't be paying interest on for 20 years. An added bonus is that if your circumstances change (due to job loss, for example), you can drop your payments back down to $400 without re-financing.

7) Pay for maintenance. Very few things get better on their own, and failing to paint the siding or fix that noise the car is making can end up costing you far more in the long run.

8) Learn to say no to things that are not important to you. (Actually, this is a good idea in general, not just financially.) Decide what charities and organizations you want to support, and say no to requests from other ones. If you can't afford to go out to eat/go to a movie/go on a trip, don't go. There are lots of ways to socialize with people without spending a lot of money - suggest something else. Keep in mind that if you decide not to do something, all you have to say is "no". You don't need to explain why.

9) Don't assume anyone else will look after your financial future.

Jammin'

My sister joined the same gym as me. She usually goes to the one right by the house, I usually go to the one by my office. Today, however, I joined her for a Body Jam class. Body Jam is is a dance-based cardio class. I'm sure I looked pretty dorky. However, it was fun. I didn't find it to be a really hard workout, but that could be because of the time I spent standing around looking lost.

More reasons to get sucked into Google's web

Today I used Google Documents for the first time. It was really useful - I was able to edit the document at the same time as someone else.

I would definitely recommend it if you are working on a document with someone else.

Mmmm, donuts

I had to stop at the bank machine this morning.

While I was there, I bought some Country-Style donuts for the office. I`ve bought donuts for work before, but that was when I worked in a building that had a Tim Hortons.

Sauna

Today, I went back to the gym for the first time in 2 weeks. I started with a body pump class (i.e. weights), then did body combat (i.e. martial arts aerobics). My theory was that I'd be less sore if I did another class after the weight lifting class. This may turn out to be false.

Anyway, after that, I took a shower and then spent 5 minutes in the sauna at the gym. It was relaxing.

Expect much whining about being sore tomorrow.

100 km.

Today I went to a 100 km lunch. Most of the foods in the lunch were produced within 100 km of the lunch location (which was a local church). There were a few exceptions for things such as coffee.

The lunch was enjoyable. I like to eat locally grown foods - they are usually much tastier than anything from farther away.

Not really solving the problem

I've mentioned before that my sister is living with me. She actually lives in the basement (like a troll - hi Wanda!). Anyway, my computer is downstairs, so I mostly use her laptop, which is usually on the kitchen table.

Earlier this week, I stood up from the table and the chair I had been sitting on fell apart.

I've been considering buying new dining room furniture since I moved in, so today I went and looked at furniture at Oxford Furniture. They make solid wood furniture, and I found a table I love. I am attempting to be sensible, so I did not buy it today. Basically, it is a double pedestal table. It opens up, and has 3 extra leaves, which store inside the table.

So basically, I dealt with a lack of chairs by finding a table. (I pretty much settled on chairs as well, but it is the table I really love.)

This is probably my last Sparks-related new thing

I have mentioned before that I am volunteering with Sparks this year. Like all organizations involving children, Girl Guides has a screening process.

Today I was screened to become a Sparks leader. I've been through the screening process before - when I left Guiding I was the one doing the screening, but I hadn't been through the interview, etc. myself because I had joined before that became part of the process.

Empty hangers

Usually I dispose of clothing I no longer need by dropping it off in one of the bins various charities have around the city, or by bringing it to my mom's place & letting my various relatives pick through it (thus making it someone else's problem).

Today I had two full garbage bags of clothes to dispose of, so I dropped them off at a thrift store. Hopefully they will be useful for someone else

TV

Today I watched How To Look Good Naked. It was interesting - the woman in the episode I watched did seem to feel a lot better about herself at the end of the episode than she did at the beginning. And the clothes they picked for her really suited her.

Sparks, part II

I mentioned a couple of weeks ago that I had decided to become a Sparks leader. Well, today I went to my first Sparks meeting as a leader. I was totally clueless about what we'd be doing, but it went well, and we planned the next 4 meetings afterwards.

Back in Ottawa

I flew back to Ottawa today. I was in the Edmonton area for 2 full days, but didn`t actually make it in to Edmonton. It was a good weekend, though.

Before going through security in the airport, I considered having breakfast at Harvey`s. However, I didn`t want to have to gulp down my drink & I couldn`t take it through security, so I went through without getting any food.

The options on the other side were limited. However, Montana`s was serving breakfast. (Do normal Montana`s locations serve breakfast? Somehow I doubt it.) Anyway, I had breakfast at Montanas. It was good but expensive - but it was an airport, so that is to be expected.

Miscellaneous Alberta things

So I'm still visiting my cousin. It was a lazy day (at my request).

However, we did make our own chips out of tortillas. They were enjoyable.

She also had some yard work to do, and in the process I used an electric lawn mower. (Don`t think I was too helpful, I only mowed a strip at the side of the house & I managed to unplug it twice.)

Groceries

Hmm. As I mentioned yesterday, I am in Alberta today. I'm visiting my cousin. It has been a good (but quiet) day. We went in to Fort Saskatchewan (about 20 minutes away) to buy groceries. For the record, the grocery store there had a better selection of produce than the grocery store I normally go to.

I also watched "Are You Smarter Than a Fifth Grader" and then watched the TV version.

More travel

Today I did several new things all related to yet another airplane trip.

I went through security in the Regina airport, where I updated my twitter status by cell phone. Then I managed to get temporarily outsmarted by a Pepsi machine. (I eventually got my bottle of Pepsi.) Next, I flew into Edmonton. It is possible that I have changed planes there in the past, but this is the first time Edmonton was my final destination.

Finally, I went to Gibbons, Alberta, which is where I am now.

(Edited to change "few" to "flew". Also, to fix the date.)

Have I mentioned I have a cold?

I believe I have whined about having a cold. (Those people who are actually around me can attest that I have been very annoying.) Anyway, I had to pick up my niece at school, but I wanted to take a nap so I set an alarm on my cell phone. I have had a cell phone for many years, but that is something I've never done before.

It went off as planned and I made it to school to pick her up on time.

Yet another cold

When I got here, my niece had a cold. Last night she started screaming and holding her ear, and thus was diagnosed with an ear infection. She went to the doctor & got liquid antibiotics, which need to be administered through a syringe type thing. (Obviously, there's no needle, they are oral antibiotics). Today I used the syringe to give her the antibiotics.

Of course, I am also getting a cold (again!). Today I am at the sore throat state. When I have a sore throat, I like to have a milkshake. They were out of chocolate at A&W, so today I had a root beer milkshake. It was good, but very sweet.

Painting

Today I painted my parents' garage door. Since I'm a full service type of painter, I also painted parts of the driveway, the ladder, and my jeans. Sigh.

Back to school

My niece is in pre-kindergarten. It's a program for 3 & 4 year olds. She loves it, and is always excited to go to school.

Today I walked my niece to school. I got to meet her teachers and everything. I suspect I'll have to go pick her up soon as well.

Turkey

When I cook a chicken, I usually just cook the chicken - I like the meat for sandwiches. Usually if I have people over (which is rare) one of them wants to make the stuffing and I am more than happy to let them. However, my mom was cooking a turkey today so I made the stuffing.