BLOGNAME: LOUDER THAN WORDSAn informal, stream-of-consciousness reflection on business ideas, events and issues in modern business, modern life and with some specifics to the web-software industry by Paul Tomori, Internet Entrepreneur
|Overcoming Financial Inertia|
How One Might Avoid Some Of The Many Pitfalls Of Financial Imprudence
By Paul Tomori
Monday, August 30, 2010 at 15:18:15 (EDT)
It's been a great summer here in Southern Ontario, Canada. Lots of heat, great weekends, yet enough rain to keep the grass from drying out too much. We have also experienced a bit of time to do yearly reviews of our financial health.
A wise man once told me that "you don't have to be sick in order to get healthier".
I believe that applies as much to one's finances as to one's health. There is always room to improve.
Today, I am writing about some ways that I or friends of mine have improved their financial health in recent times. But, we start with Newton.
Most people know that Sir Isaac Newton came up with 3 laws of motion. The most popular is probably that Body A puts an equal and opposite force on Body B. But, that is Newton's 3rd. law. Today, I am borrowing from Newton's 1st. law to identify what I am calling "financial inertia".
That first law states that a body will remain at rest or in motion, in the same direction, unless acted upon by an outside force (aka: inertia).
The parallel to personal finance is that, financial habits tend to remain in effect unless acted upon by improved financial stability or more likely, reduced financial stability or simply by austerity measures. Another wise man said that the "chains of habit are often to light to feel until they are too heavy to be broken". In finance, the right set of habits can set a course for personal prosperity, while the wrong habits can utterly weigh one down with insurmountable debt.
I am pleased to say that I have avoided some of the bigger pitfalls relating to personal finance, the biggest being a "leveraged (i.e. debt-financed) lifestyle". This has meant some lag here and there if I compare myself to some of my peers, at least in our standards of living. However, it has given me great peace of mind and the ability to sleep without worry.
However, in a bunch of small ways, I have come to realize some very bad habits in how I was running my finances. So, sure, I have avoided the icebergs of debt, but I have let there be a handful of small holes in the hull of the personal finance ship. Even together, these small holes are not enough to sink the ship, but why not plug them if you can? Here's the answer:
When I mentioned this to some friends, they started to speak of their own small lapses and so here's a list of what could be subsumed under the heading of "avoiding the pitfalls of financial inertia":
- Switch to a NON-Fee-based Bank Account. This one was mine. For over 20 years, I have had the same CIBC checking account. Every month, for 20 years, I have paid monthly "service charges" just to do the basics of writing checks, using ABMs, etc. All the while, banks like ING and PC Financial have come along offering "no fee banking". Let's face it, writing checks and using bank machines is pretty much now a commodity service. It's not like I am going to get better service from one machine over the other. This reduces the comparative basis to that of pricing and availability. As you probably know, the PC Financial brand runs on the same ABM network as CIBC, so with a PC Financial account, I can go to any CIBC bank machine at the bank locations, or Zehrs Grocery chain or 7/11 or elsewhere and access that account.... without fees. So all things being equal, why would I stay with CIBC for over 20 years? Financial inertia.
- Run From The High Mortgage Interest Rate. When I bought my current house a few years ago, I negotiated a pretty good interest rate and terms. But since that time, interest rates have dropped even further and have even hit historic lows. Yet, I never sought to re-negotiate the mortgage. Even shaving 1 percent off the interest rate can save many thousands of dollars. Sure, there was a penalty to re-work the mortgage, but even with the penalty factored in, my overall, savings will be about $7,000 over the next 5 years. So, why didn't I do this sooner? Financial inertia.
- Avoid Self-Directed Investing Account Annual Fees. For over 12 years, I have used the same self-directed investment account, paying $100 yearly for that "luxury". Yet, during that time, many competing services have entered the market and they don't charge anything! In fact, I had setup an account with a competing institution about 2 years ago and still didn't clue in that I should move away from the fee-based institution. Finally, when I made the move, the institution I was moving away from charged me $135 to "release" my funds. Talk about adding insult to that yearly bleed of injuries. Personally, I think they are very short-sighted. I will never go back to them. But, why didn't I move sooner? Financial inertia.
- Use A USD Credit Card For U.S. Purchases. Did you know that the posted Exchange Rate at a site like XE.com is NOT the exchange rate you pay when you transact USD currency into CAD currency? That posted rate is only the "spot" rate. It is used to guide large financial institutions as to what THEY can trade currency at. For all the little people, currency transactions are hit with a typical 2.5% commission payable to the financial institution handling your exchange. That's $25 on a thousand dollar purchase! You can avoid that commission fee if you use a USD credit card. It's easy to obtain... just fill out a form at your bank. Now, if you don't have USD cash with which to PAY your USD credit card balance when it comes due, then you haven't completely avoided the problem... you have just deferred paying the commission. However, if you are in business and maintain a USD bank account, then that provides a source of USD currency from which to pay any USD bills. At my firm, we process a large number of domain name renewals to U.S. based registrars. We also buy pay-per-click advertising in USD... all to the tune of 10's of thousands of dollars per year. So, that commission fee is particularly important to avoid. Alas, we have not been so diligent over the years and I shake my head at the unnecessary fees we have paid. But.... NO MORE!! Incidentally, if you are just exchanging currency at the bank in smaller denominations, I have found that HSBC has the lowest commission rate of about 1.5% on USD-CAD transactions. Of course, that varies!
- Eliminate Un-Needed Office Space. For those of you in business, assess your true space needs. In recent years, my company has found that some staff work better and prefer to work away from the office... at home... in coffee shops, etc. The nature of our service lines means that we can "write software from anywhere". This is very liberating for people. It also liberates office space. A recent assessment of our own needs resulted in a re-negotiation with our landlord to reduce our space by a whopping 50%. Wow. That kind of savings translates into a month over month expense reduction for years. THAT really adds up.
- Setup A Home Office And Offset or Even Deduct Home Expenses. Check with your accountant on this as there are some stringent rules about how to obtain this kind of tax deduction. But, from what I have discovered, one can write off hydro, gas, phone, internet, and even cable expenses roughly proportionate to the square footage assigned for a home office. To qualify, from what I understand, you need to make your home office space, your primary work area, but again, consult a professional. A penny saved is a penny earned, so any tax benefit you can gain from reducing those after-tax costs for utility bills will add up tremendously over time. One drawback is that if you need to actually build a home office space, you cannot write off the capital expenditure of the renovation.
- Watch For Automated Charges On Your Credit Card Bill. Inertia kept me from closely analyzing my credit card statements for a period of time a few years ago. Then, our book keeper asked me about a certain $10 charge that was coming off the card every month. I looked and didn't recognize it. On further inspection, we discovered that something I thought I bought as a one-time purchase 3 years prior had been mis-purchased as a auto-renewing subscription! It was for access to a website that contained technical information. I had only needed it once, thought I had paid the necessary $10 for that one time... but lo and behold, got hit with $360 charges over the next 36 months. Dumb. Make it a point to always review your credit card statements or assign this to a book keeper with a keen eye. My book keeper saved me from another 12 months of financial imprudence.
- Pay Attention To Currency Costs On USD Stock Purchases. Let's say you buy Microsoft at $25 USD using Canadian funds. You just paid your broker an extra 2.5% on top of the transaction fee! That's called the "spread" (i.e. currency commission) that the financial institution charges to first sell you USD currency before they facilitate your stock purchase! Make careful note of that currency cost, because even if the stock goes up, the strength of the Canadian dollar could rise which would make selling the stock later, even for $25.50, a losing proposition. What you gain in stock value could easily be lost in the currency costs. Especially, if you sell back into CAD funds. To avoid this, (after learning the hard way), I now just push USD currency into my investment account, then I buy USD stock with that currency. Then, when I sell, I make sure that the broker is instructed to return my cash in USD, not in CAD. Voila, NO currency costs. Note, it can work in reverse too. The USD stock price could go down, but the CAD dollar could drop too which would still make selling the stock a win for you.
- Use a Discount Brokerage and Consolidate Your Investments To Get The Best Trading Commission Rate. If you stay with one of the big 3 banks in Canada to handle your investment portfolio, you are typically paying as much as 3 times the going rate for similar (or better) services elsewhere. There are a large number of independent brokerage firms who are in business without all the fancy office towers to cover overhead for. You can get excellent online service for less than $10 / trade. It helps considerably if you consolidate all of your investment dollars in one account since most brokerage firms will lower your commission rate if you reach a certain threshhold of balance in your account. So, don't maintain an RRSP account at one location and a TFSA account at another location... consolidate them at one place and win! I learned this one the hard way too.
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