Make Use of Your Credit Line and Payoff Your Credit Card

Pretty much everyone I know has some form of credit card debt. To be honest you should never carry a balance on your credit cards. Next to payday loans, credit cards have one of the worst interest rates you can get and they can increase if you are irresponsible with them. On average credit cards have interest rates around 18.9-19.9%. If you are delinquent and don’t pay on time several times, this interest rate sometimes goes up.

How Important It is to Payoff Your Balance Every Month

Paying off you balance every month is probably one of the most important things you can do to improve your credit rating. It tells credit card companies as well as credit rating companies that you are a responsible credit user and that if a financial institution is considering lending you money, you are more likely to pay them back in comparison to others.

If you don’t pay off your monthly balance on your credit card, it can be your first step to financial hell. If you don’t even pay the minimum balance on your credit card, despite what others say, it is bad for your credit. Even if you do pay the minimum balance on your card, you will be charged interest daily for whatever balance you carry. So even if the credit card interest is 18.9%, because you are paying daily interest, the reality is that the interest rate that you are paying is much higher.

In addition, if you don’t pay off your entire balance, you will be charged for the entire balance of your previous month’s credit card balance, not just what you owe. It’s really scary how credit card companies charge interest. Furthermore, as you hold off paying off the balance you start seeing residual interest, interest that is carried over from before for not paying the balance.

What to do to make sure you Pay Off the Balance on Your Credit Cards
I’ve give ideas before in my previous articles about credit cards. (Read “Make Credit Cards Work For You!” & “Becoming a Smarter Credit Card User”) A new idea that I can give you is to utilize your line of credit, if you have one. A line of credit is basically a guranteed loan by the bank for a set amount of dollars at a set percentage. Line of credits are great because you can control how much you spend without having a crazy interest rate. Depending on your credit, your line of credit interest rate could be as low as prime or prime + 1%.

Now in Canada, the current prime rate (and interest rates are at record lows by the way) is 2.5%. So if you have a prime + 1% rate then you have a 3.5% interest rate, that’s nothing compared to the 18.9% or 19.9% interest rate you will be paying on your credit cards. In addition, for your line of credit, you usually only have to pay for your interest and there is no minimum balance that you have to pay monthly. You also won’t have to pay any other hidden fees or residual interests as you would with credit cards and as long you pay the interest monthly, your credit rating will stay intact.

Mo2 Thinks
If you have a line of credit but are carrying a balance on your visa card, pay off your visa right away by utilizing your line of credit! It’s much smarter financially and it’s also better for your credit rating. You have to minimize the amount you carry on your credit card at all costs. If you don’t you seriously will be facing financial failure and I just won’t allow that! Take control of your finances, and be sure that you aren’t over spending or buying things that you don’t need on your credit card.

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What the heck is a Total Debt Service Ratio? I think it’s edible…

What the heck is it? Well, you may or may not have heard about it before. But take a read anyway!
Can you afford more debt?

After writing about car buying it made me want to write about how much debt an individual could afford. I don’t think too many people think about how much debt they can really have. By using the Total Debt Service Ratio (TDS hereafter) you can get a decent idea as to how much debt you can have relative to your earnings.

So how is the TDS calculated?

The TDS is calculated as follows: Monthly mortgage/rent + Property Taxes + Heating + 50% of Condo Fees + Debt Payments Divided by Monthly Gross Family Income

So that means if you’re paying $1,000 rent, $5,000 in annually property taxes, $100 for heating, and $600 for monthly debt payments and earn $6,000 a month this would mean:

=$1,000 + $416,67 ($5,000/12) + $100 + $600
$6,000

= $2,116.67
$6,000

=35.28%

Ideally you should be under 40% for the TDS. In the case above, you would be safe. This means that you can use up to 40% of $6,000 on a monthly basis, which amounts to $2,400. That means you can afford $283.33 more in debt. Obviously you shouldn’t be maxing out your debt and should be actually putting more into savings, but by knowing how much you can really afford without hurting yourself is a good place to start.

Who Looks at these Figures?
Financial institutions often use TDS to determine if you are capable of borrowing money from them. But that shouldn’t stop you from doing the calculations for yourself to help you determine your financial health. Always stay on top of your figures. That way, when the time comes to borrow money you can be well prepared and this will show the financial institutions that you are a responsible individual that can handle more debt.

Mo2 Thinks
By using the TDS it helps you budget your monthly expenses and gives you a nice round figure to determine how much debt you can carry out. Mind you, the TDS doesn’t include everyday expenses like food, cell phones, Internet connection, etc. You need to understand how much you need for those expenses and that’s why the TDS is limited to 40% because it takes into account that you will have other expenses.

When buying a car, it will most likely increase the debt that you have. While TDS is often used for bigger purchases such as a new home, it doesn’t hurt for individuals to calculate their TDS after a car purchase. This should help you determine what car you can actually afford. If you can’t handle car debt, imagine what you’ll be like with a mortgage. Yikes!

There is something else called Gross Debt Service Ration (GDS). The only difference is that with the GDS you don’t take monthly debt payments into consideration. But I like to use TDS more, but I guess you could use both. The GDS should be kept below 32%. Either way these ratios will help you determine how much debt you can have.

In North America we are starting to spend more than save. Ideally you should be saving as much as you can, but that isn’t always possible. Therefore, the first step is to control and reduce your debt. Once you have everything under control then you can start to look to save and create a worthy investment portfolio. Remember, everything requires planning and the more financial education that you have, the more it will help you in the future.

Tomorrow I will be writing about how goals and dreams are necessary and how documenting them is very important!

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To Invest or Not to Invest in a Horrible Stock Market, That is the Question

The stock markets are down and there are a lot of people in a really bad mood because they lost a lot of money in the stock markets. It doesn’t stop there because the economy in general is so horrible it’s pretty much affected everyone and I’m betting that my readers are feeling the negative vibe as well.

The purpose of this article is to help you decide if you really want to invest in stocks at time like this and what you should do going forward from here.

Always Think Longer Term
When you look at most things in life, you don’t want to think about what the result of something will be right away. No doubt, there are many outcomes you want to know about right away but in general you want to think about how an event can help you in the future, the longer-term. The stock market is one of those places. Except for traders that try to come up with short-term gains, many people invest in the stock market to increase their money through capital gains and dividends.

In my opinion, in the longer term the markets will improve. I cannot guarantee when it will happen and by how much, but if you stay with your plan of thinking longer term then the markets will definitely reward you for having a positive mindset. If you’re just starting to invest now, it’s a great time to begin because many great companies are valued so cheaply that you can buy many stocks at a bargain. Even if you are already invested in the markets, by adding to your investments now, not only can you average down your cost bases, you can also benefit from the potential upside that will occur eventually.

History tends to repeat itself, and after market downturns when everyone is scared of the markets, it is usually the best time to invest as the market will turn around and potentially hit new highs.

Only Invest What You Can Afford
It really depends on your risk tolerance but you should not be investing money that you cannot afford. Don’t put your food or rent money into investing in stocks if you aren’t comfortable with it. You have to use money that potentially you won’t be touching for years down the road and money that you can actually give a chance to grow without interfering by taking it out of the markets.

I would not recommend borrowing money or using margin accounts at times like this when there is great market volatility. Unless, you are extremely experienced with trading and investing in these types of markets, it’s in your best interest to be sticking to cash account investments. This way you are only exposing yourself to as much risk as the money you put it.

Buy Quality
Everything is down, but that doesn’t mean everything will go back up. Because many countries around the world are in recession, many big companies have gone under such as Bear Stearns and AIG. Potentially more companies could go under, as we might not know what some of these companies might be doing internally.

Therefore, you want to stick with the companies that are extremely strong and sustainable at times like this. You have to do your research and take what the media says about stocks. If you want to invest your own money you have to understand what you are putting your hard earned money into.

As a starting point, think of the companies that produce goods and services that are needed in our society so that we can all function. As much as the big banks have been hit hard they are still necessary for our system to operate. Many other companies that produce goods and services are needed so that our society can make our way through these dire times and into a more positive time. These are the companies that you want to invest in, and it depends on where your expertise lies. Start your research with those companies and gradually expand what you are looking at and you will definitely find very strong and worthy companies that are

If you Must Invest in Speculative Stocks…
Speculative could mean anything, but for our purposes think of a speculative stock as something that isn’t as safe as anything I just mentioned regarding companies that are strong and sustainable. These would be companies that have a chance of going under in these times of turmoil or companies that are trying to grow their way up. Either way it’s honestly very hard to determine where a company will go.

If you must invest in speculative stocks, make sure you keep your investments small in comparison to your other investments. Diversification is key, however remember that these speculative stocks could go bankrupt and bring your portfolio down. On the other hand, one of the stocks that you buy could emerge to be a huge winner and help you grow you portfolio. Either way, you don’t want to bet the farm on these stocks and know where you want to go with these investments. For example, set a goal. If you make a 25-50% return on one of these stocks (which potentially could happen) reduce your exposure.

Dividends
Dividends are great; they will keep you running in horrible times. The blue-chip stocks are the best for dividends not because they pay the highest yields, but because they will most likely maintain their level of dividends even in times of recession.

What’s even greater about dividends are when the price of a stock is low, you will most likely get a better yield on your investment. Let’s say ABC Stock is trading at $20 and their dividend is currently at 7% (which may sound high but you see quite a few of them right now). So that’s an annual yield of a $1.40.

If the stock goes up in three years to $30 then your return would be $10 + $4.20($1.40 x 3) = $14.20 per stock. That’s a 71% return in three years! Not too bad to be honest.

I’m not saying every stock is going to perform like that and I don’t want you to be going out there buying stocks that are $20 with a 7% dividend just because I wrote that. My whole point is that dividends can increase your returns significantly while providing you a steady cash flow when you really need it.

Dividend cuts are not out of the question so be sure that you are picking companies that are very stable.

Mo2 Thinks
Many people are faced with the question, should I keep my money in cash/cash equivalents or buy stocks? Again, it really depends on a variety of factors such as your risk tolerance and stage in life. You always want to think about balance in life, and investing in your portfolio is no different.

Many people say cash is king. This isn’t always true in the investment world. With inflation looming around all the time, if you leave your portfolio in cash you could actually be losing money! That’s why you need to offset inflation risk by investing, even if it isn’t in stocks.

By investing in stocks, it gives you the opportunity to grow your portfolio that otherwise isn’t possible with cash equivalent and fixed income investments. Obviously, with this potential comes the risk of your stock investments falling like crazy as they have over the past few months. But the upside potential is always there as well. Therefore, you want to diversify as you probably have heard time and time again. By diversifying even if a part of your portfolio is down, another part of it will help you get past the troubled times and into the a brighter future. Think long-term and you should be fine, don’t be misguided by the media and by short-term failures. Always keep your strategy in mind and you will be fine. Good luck!

Tomorrow, I will be writing about Retiring early by building a cash flow portfolio! Stay tuned!

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