Reader J.L. writes, " What I need is a lesson." This is a fellow who took out a 7% car loan a year ago, and now can't get a lower one, despite the Bank of Canada rate being 0.5%.
As I've told my kids, there are two parts to becoming wealthy: (1) make more, and (2) spend less.
In particular, banks don't need more of our money from fees (which includes interest paid on loans and mortgages). For instance, J.L. hoped to get a lower interest on his car loan from ScotiaBank, a bank that yesterday reported $900 million profit for the last three months. Banks remind me of oil companies: the price of oil has fallen 3.6x, but the price of gasoline (In Canada) has fallen only 2x.
Here's the thing: he shouldn't have taken out the loan in the first place. As I tell my kids: save up, then buy. (Don't buy, and then pay interest, which increases the cost of the purchase, and makes you less wealthy.) For our oldest, the advice seems to have taken hold. A couple of years ago, he turned 20, and he and I agreed that he would be on his own when it came to money: whatever he earned, he could spend. I am pleased to see him saving his paycheques (he works as a non-union janitor). He carefully monitors the sales fliers, eBay, and other Websites to know when to pounce and purchase the big-ticket items he wants with cash.
(Actually, he uses a credit card that pays cashback, and then pays it off in full each month.)
Bank Fees
While many banks tout "low monthly fees," you should be looking for no fees. Our son has a no-fee chequing and savings acct with a local credit union. My wife and I have a grandfathered account at our credit union that has no fees. Its Web site lets me pay my bills and transfer funds between family accounts, and charges no fees.
Some banks waive fees in certain cases. I have a Bank of America account that is fee-free as long as I make at least one direct deposit a month. So, once a month I xfer a nominal amount into it from my PayPal acct.
Banks make tons of money by paying poor interest, and so they have no need to collect fees. Before buying our house in 1991, I spent many hours in front of a spreadsheet, optimizing the mortgage -- which meant figuring out how to minimize the total interest paid to the bank. In addition, I made a very high down payment. As a result, I was able to pay off our mortgage in 2 years.
(Here's what the spreadsheet told me, stuff that bank didn't tell me. At the then-current interest rate of 11.5%, the optimal mortgage duration was a maximum of 13 years; any longer and the interest payments would balloon. The bank's terms allowed me to increase my monthly payment by 10% once a year, and to pay down the principle by 10% once a year, with no penalty. Those two factors alone would allow me to pay off a 10-year mortgage in 5 years. Note that interest payments are not a tax deduction in Canada, as they are in the USA, and so mortgages tend to be shorter here than there. Because I was unemployed at the time, I began with low monthly mortgage payments. But after two years, I was able paid off the remainder of the mortgage after paying an $850 penalty. It was well worth it.)
High Interest Accounts
To get high interest on saving accts, you have to deal with non-traditional banks. I have such accts with two banks, where I stash cash. A subsidiary acct holds the money one daughter is earning (and saving) towards her 3-week study-travel trip this Spring to Europe. It made her an extra $100 (roughly) in interest in the two years she saved up. She's pretty pleased to have earned the entire cost through the part-time job of notetaking for disabled students at her university. (Her airfare was covered by points she's collected.)
Another subsidiary account holds the rent our son pays us; we are storing it in case of an unexpected need. (Our kids have to pay $400/month rent for living at home, if they no longer attend school.) Which leads to the final topic...
How to Save
One of the keys to wealth is to spend less. I've described some tactics above: don't pay interest; don't pay bank fees; earn higher interest; get cashback or points on credit cards; pay off credit cards in full each month. (Use a debit card, if you can't control your credit card use.)
But the ultimate way to spend less is to have less cash laying around. If I don't know that I have the money, I won't spend it. (This tactic does not work for people with uncontrollable credit card spending.) So I stash income into obscure accounts, and then "forget" about it.
These are high-interest fee-free accounts where I cannot easily get at the money. For example, AltaMira and ING Bank offer such accts. I don't receive a monthly statement reminding me how much is in the account. I can only get at the money by making a phone call and dealing with the bank's call center (to request a transfer into my regular credit union acct). And I don't like making that call!
I have found this system works well for me ever since I implemented it several years ago. When a regular bank acct has $100 or $2,000 or $30,000 less in it, it's not going to get spent, and I am forced to live on less. I no longer run out of money before the end of the fiscal year, and that's a darn good feeling.
My other daughter has begun to understand this tactic, and asks me to "hide" some of her income from her. She now sees just $179 in her acct, and has cut back her spending -- instead of seeing $629. She's saving up for a good camera, for which she'll pay cash.
Summary
This is not about sabotaging the economy by spending less. This is about spending wisely. I was happy to pay an interior designer and a craftsman $16,000 to remodel my office ten years ago, because I hadn't given the $16,000 to a bank for mortgage payments.
It takes some effort, but it gets easier as you get used to doing it. But I recognize that this way of living financially is not built into some people's genes, and it may well be impossible for them to follow. For others, it is possible to live in a manner that displeases the banks.
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