Does the number of bank accounts affect your ability to save?

I came across an interesting article and research paper recently from the University of Kansas that concluded a person with a single account would save more than a person with multiple accounts.  The research suggests the reason is people have a strong desire to spend money for immediate gratification and having multiple bank accounts introduces enough fuzziness or vagueness in knowledge of their finances to allow them to more easily make purchases because of incomplete information.

I could be in trouble.

Between my wife and I, we have 3 bank accounts and that’s not including RESP, RRSP and other special accounts.   The research does suggest that some people are more comfortable with handling multiple accounts than others.  We are a perfect example of both groups.  My wife asks me fairly often which account she should use to pay for something or do we have enough money for X whereas I normally have a good idea on “how we are doing”.  I admit I’m the one paying all the bills so I have an advantage in having this knowledge but I think my wife and I just view money differently.

Multiple accounts definitely still do have a place in savings strategies (e.g. short term vs. longer term, taxable vs. non-taxable, regular expenses vs. discretionary) but what’s important is to have a consolidated view of your accounts and finances to eliminate this vagueness.  This idea is reflected in a lot of personal finance articles talking about calculating your net worth on a regular basis to understand your financial situation.  

Wealthy people understand this idea.  One of the key services demanded by them and offered by their financial advisors is a “consolidated” view of their accounts or finances and not just once a year but as part of their monthly statements or on-demand.  Many banks have already recognized this need by offering an summary view of your accounts when on-line or via paper statements.  There are also many good software packages available to help you determine your net worth or account aggregator software to help you combine your accounts from different institutions.  So lots of evidence this is a need.

Based on our discussion, we reach some of the same conclusions as research below:

• Minimize your number of accounts
• Maintain a frequent consolidated view of your accounts to eliminate any vagueness/fuzziness

Want to read more about this?  Check out the following:

• Influence of motivated reasoning on saving and spending decisions, University of Kansas, Promothesh Chatterjee
•  Trying to save more? Consolidate your bank accounts, researcher says, Lawrence

James Whelan

The Queen needs a budget so why shouldn't you?

Yes you heard right.  The Queen of England, one of the wealthiest people in the world, needs a budget.

Let's take a quick look at her current situation.

• She lives on fixed income provided by her employer and her expenses are bigger than her income.
• Her primary residence, Buckingham Palace, has the following problems:

• Furnace needs replacement
• Furniture is worn and needs replacement
• Some parts of the building are in serious need of repair (cracks in roof, some walls falling apart)
• Utility bills increased significantly last year due to unexpected cold weather

This sounds just like problems faced by everyone else but of course everything is on a much bigger scale. For example, we may pay $3000-5000 CAD for a new furnace whereas it will cost her $1.65M CAD.

So if we were to do one of those financial checkups on how she is doing it would look something like this:

The Queen needs to eliminate the gap between her expenses and income.  She has made a good start  by reducing her travelling expenses, not spending as much on people helping with household chores and adding to her income by renting out rooms in her home.  Unfortunately even after this, she has had to use a large part of her "rainy day" fund for years for everyday expenses not leaving anything to use for repairs to her house.  An option, available to most people, of downsizing her house and selling other property holdings may not be an option since they are not owned personally by her but by the people of England.  Making hard decisions to correct her situation can not be delayed any longer.  Here are some key items to immediately look at:

• Talk to her employer about a raise.  The royal family and their properties provided $418M CAD in profit to them last year.
• Talk to her employer about substantially reducing the property holdings they own either by selling or renting them
• Reduce non-essential expenses, especially ones not contributing in a significant way to her employer's profit. For example, the Royal Train costs $1.65M per year to operate.      

Want to read more about the Queen's finances?  Checkout the following:

• Globe & Mail, October 14, 2013
• National Audit Office, England - Royal Travel, Sovereign Grant, Crown Estate

James Whelan

Buying cars on credit... what does it cost you?

A couple of weeks ago, I had the privilege of attending the Financial Literacy Educators Summit put on by the Investor Education Fund.  This workshop was very well designed and provided inspiration and training to the elementary and high school teachers attending.

One of the speakers was Preet Banerjee, who did a great presentation called "Why 2.5 Billion Heartbeats Might Change The Way You Think About Money" and had some new ways of looking at some old topics that really got you thinking.  One of them started by taking the fact that people on average will own 9 cars in their lifetime and looking at the extra money you would pay over your lifetime by purchasing cars on credit (via car loans) compared to paying for them without borrowing.  In the example he used, if a person purchased without borrowing, they would be able to buy an additional 2 cars over their lifetime compared to the borrower.

This was a very powerful image and thought I'd try it out with my nephew.  He graduated from college recently and as soon as he got a full time job, bought a brand new truck on credit.  Perfect.  I'd ask him the particulars about his purchase, do some calculations and tell him how many additional cars he could buy.

Our talk started out well.  He told me the cost of his vehicle and the month payment and payment term.  So far so good.  It fizzled when he said it was zero percent financing.  No calculation could be done telling him about his additional vehicles.  We did have a good talk though about what that means.  Basically, he knew he had probably paid more for the vehicle than he could have without the zero percent financing.  He had lost some of his negotiation power by accepting the deal.

I decided to do a bit more research.  I found some of insightful reading. One article claimed buyers who receive zero percent financing frequently don't negotiate the price thinking they have the best deal possible and in some cases the zero percent financing costs more than if the person used a regular car loan.  Other articles talked about the limitations of these financing deals (e.g. shorter terms/higher payments than normal car loans, the requirement for near perfect credit scores to qualify, application to only limited car models).  More than a couple recommended negotiating the best price possible before talking about financing.

My nephew's experience definitely matched the observation about not negotiating.  The message in most of the articles was to evaluate the different options available.  Seems like sound advice because as the old adage goes "if it seems too good to be true, it probably is".

James Whelan 

Now and Then. How financial literacy has changed for our kids.

My wife was at a conference recently where one of the topics was how financial literacy needed for our kids has changed compared to what their parents and grandparents needed. An interesting topic. Here are some areas where I see this.

1) Payment methods. It wasn't too long ago "cash was king". Most people paid for things with cash or personal cheques and had a paper book to updated at their local bank branch. Now people rarely physically go into a bank branch but use ATMs or instore cash-back to get cash, use ATMs, online methods and sometimes cheques to pay bills and debit cards, credit cards, smart devices or cash to make instore purchases. What does this mean for our kids? First, they have a lot more options so need to know a lot more to make the right choices. Second, some things critical to financial literacy such as budgeting and cash management are a lot harder. When you just had cash and your bank book it was easier to find out how you were doing compared to your budget compared to now where you can easily spend money via your debit card, for example, and not know your account balance.

2) Investments. I remember my parents range of investments, when I was growing up, amounted to banks accounts, GICs, and Savings Bonds. Sure there were people investing in stocks, bonds and other investments but not generally the "masses". Then came new investment types (e.g. Mutual funds) and channels to access them ( e.g. Online access to self controlled accounts). This led to a huge shift in people investing in asset types they never did before and an increase in "do-it-yourselvers". For our kids, they need to know enough to understand their investment choices so they can invest on their own or at minimum have some basic background to understand what is being offered to them by investment professionals.

3) Outsourcing. Many people now will "outsource" some of their routine non-paying work to others compared to previous generations. People eat out more frequently (i.e. don't cook for themselves), hire others to clean their house, or cut their grass. For our kids, this has created an expectation, and with this, the need for the extra income to fund this and more thought on how to budget for these "nice to haves".

3) Supersize. The rise of consumerism has created the demand for the "supersize" whether for restaurant meal portions, cars, houses, TVs or other items. We have created a strong desire for these "nice to haves" and the feeling for our kids that it is okay to go into debt to get them.

This list could go on and on. So what does it all mean? For me, it has further reinforced the need for our kids to gain financial literacy knowledge prior to needing it rather than learning only through their own experiences or by accident.

James Whelan, www.moneymatters4life.ca

Where does the money come from or how businesses make money?

An interesting conversation you can have with kids or anyone for that matter is when you're talking about a company or business....where does their money comes from and how do they make money/profit?

A lot of times kids don't really understand this but talking about it with them is a great way to enhance their financial literacy and really just part of learning how the world works.  Kids using technology especially become isolated from a lot of this because a lot of things seem "free" to them.

I started thinking about this after having a conversation with my son about "monetizing" his youtube videos.  He has been quite active for a long time creating and posting youtube videos so this prompted us to talk about if he makes some money doing this, how does youtube make money.   Basically, he figured out that advertisers pay youtube fees to post their ads on videos and they share a slice of the money with him. Before I asked the question he hadn't really thought about it.

Here are some examples of companies/businesses you can talk about - Grocery stores, Car manufacturers, Car dealers, Cell Phone companies, Banks.  All of them have different business models and it is interesting how they make money.    For example, many car manufacturers don't make most of their money from making cars but from financing people buying cars.

Examples are all around us.  See if you can come up with any to discuss with your kids or students.

James Whelan, www.moneymatters4life.ca

Credit Cards - Understanding your rates

I had a comment after my last posting "Credit Cards - Are they for everyone" from Marc at GreedyRates.ca that not all credit cards have high interest rates.  He has a point.  Some cards have fairly low rates.  The "high interest rate" disadvantage in my posting was more about credit cards having high interest rates especially compared to other forms of debt because credit cards are really just a type of loan.

For those of you who are thinking of getting your first credit card, just received a credit card or are experienced credit card users, I have a question for you -- Do you understand your rates?

I took a couple of credit cards at random to look at the rates.

Card #1 - Offered a 0% rate for the first 12 months but then after that increased to 17.99%.  If you didn't make your minimum payment twice during any 12 month period, they'll add on another 5% to give you 22.99%!! until you maintain at least your minimum payment for 12 months.  Card #2 - Offered a 9.99% rate.  If you didn't make your minimum payment twice during any 12 month period, they'll add on another 5% to give you 14.99%!!

So depending on the card, much different rates and some additional penalties is you don't pay on time.

There is another concept people sometimes are not clear on - Interest and relation to Grace period.   Most credit card companies will give you about 21 days grace to pay the bill so if you statement date is November 5, the Payment Due date may be the 25th of every month or November 26 for the November statement.  Here's the part where there may be some confusion, if you make your payment in full by the due date, then all interest charges for new purchases are waived.  If you only pay the minimum, you are charged interest from the date of the purchase and not the statement payment date.

These are only a few details to understand.  For a lot more detail, try the Credit card section on the Financial Consumer Agency of Canada website - www.fcac.gc.ca

If you want to compare cards, www.creditcards.ca or www.creditcards.com are good.  I took a look at GreedyRates.ca also.  Worth a look.  Entered criteria is applied to reward formulas and interest rates and gives an evaluation of cards including their view of pros and cons.

James Whelan, www.moneymatters4life.ca

Credit cards - Are they for everyone?

A friend of mine confessed to me recently that he used to have a credit card but had to get rid of it.   He saw it as "free money" and had every intention to pay it off at the end of each month but ended up only paying part of his balance and very quickly ended up owing a large amount.  He made the decision to get rid of his card, worked at getting rid of his debt (this took a long time) and now only buys things if he has the money to pay for it.

So credit cards may not be for everyone.  Here are some thoughts on the advantages and disadvantages of having them.

• Advantages: Convenience, Access to Funds, Safe and Reliable / Fraud Protection, Insurance for Purchase, Rewards

• Disadvantages: Convenience, High Interest Rates, Potential Fraud, Higher Prices for all Consumers, Decreased Self-Regulation, Hidden fees

The disadvantage that caught my friend was "decreased self-regulation" or when you don't regulate your spending as much as you should, do more impulse buying, less comparison shopping etc.

Here are a couple of links you may find useful for teaching students, children (and adults) about credit cards:

• Get it on Credit This video is very entertaining while at the same time you learn about credit cards, payment terms, compound interest and credit scores.
• Funny Money - Cost of Borrowing  - This is a great lesson created by the Investor Education Fund, a Canadian non-profit organization, for learning about reading a credit card statement and the cost of using credit cards.  See the video they also created in the link above. 

James Whelan, www.moneymatters4life.ca