Toxic Workplaces: How to Stay Positive
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Keeping a positive mindset in a toxic work environment can be an extremely difficult task. I've spent some time in toxic work places and motivating workplaces and there is a vast difference between employee moral …

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Smart Money Management

Submitted by on Tuesday, 22 March 2011No Comment
Smart Money Management

The debt that North American’s have currently is a little frightening given the state of the economy. With unemployment rates higher than the norm, its a little concerning seeing the average debt per capita on the rise as well. The even more frightening part is many North American’s may not understand what this means for them. It a nutshell it means more of the money that you spend will go towards interest rather than paying down principle. There are a few strategies however that might not eliminate the dollar value of the debt but perhaps lower the interest payments.

First, if you have several credit cards, debt consolidation can be your friend. This means that you transfer all of you debt to a single source so that monthly payments are more manageable and you don’t have to worry about paying off several cards. Although a single credit card might not have enough available balance to hold your total debt, using your cards with the lowest interest is a start. There are some cards that charge a whooping 30% in interest to borrow while there are others on the market that are as low as prime + 1% based on your credit history. Take your highest interest debt and do a balance transfer to a lower interest paying credit card. Some don’t see the need for this strategy but here is a snap shot of how much you can save. We’ll look at a card that charges 20% vs. 7% interested on a $5,000 balance to show you how much extra you’re paying. Also keep in mind the interest is compounding on the balance, so if you compound more than your monthly payment, you’re never getting rid of that debt. If your goal is to pay off that debt in 18 months, here is how much interest you would pay at 20%, $1572 compared to $534 at 7% over the 18 months (assuming no payments). That is a difference of over a $1000 just for a simple debt rebalance strategy.

Another option to consider a secured or unsecured line of credit. A secured line of credit offers a lower interest rate, in some case prime minus 1%. At today’s rates you can get an interest rate of 2.5% with a secured line of credit, taking the example from above, that means you would pay approximately $190 over the 18 months in interest. An unsecured line of credit generally have higher interest rates, usually prime plus 2-3% depending on your credit history.

Refinancing your mortgage at a lower rate is an option that some North American’s might make use of. This options essentially pays down your higher interest debt, but increases your principal on your mortgage. However, you would amortize your debt over a longer duration so the payments are manageable but in some cases, you could be paying more interest over the duration of the loan. If you have an open mortgage, you can make payments as often as you like and don’t have to worry about take the loan out 25 years. Even in a closed mortgage you have the option of increasing your payments (more than the minimum) which can help you pay down your debt faster.

If you have savings then your best bet would be to pay down the debt than to put the money in the savings account due to the varying difference in interest earned vs interest paid. A lot of North American’s feel the need to have money in the savings account while carrying excessive debt. While this provides a level of comfort, your net worth effectively would be decreasing using this method (assuming the borrowing rate is higher than the paid rate).

Another great strategy would be to borrow money at a low rate and re-invest it into securities that provide a higher rate. For example if you have $10,000 in cash stocks, sell your stocks, pay down your debt, re-finance $10,000 and re-invest in the stocks. What this enables you to do is write off the interest against borrowing. Effectively you’ve paid down your debt and you are using the bank’s money to finance your investments. Any cost of borrowing can be written off against revenue made from your investments such as dividends or sale of stocks.

If you like to do charitable donations and have some stocks handy, your best option is to donate your stocks rather than cash. The simple reason for this is cash is an after tax asset, however stocks are a deferred tax asset. What this means is you dont pay any capital gains on the stocks unless you sell them and some cases the capital gain can be quite high. In Ontario is you donate your shares to a charity you are exempt from capital gains tax, as a result you are donating an amount that is pre-tax and will result in more money going to the charity and a higher tax savings for you.

We’ve all talked about the RRSP/RSP investment options and its a great tool to help reduce your income tax, however, from an investment standpoint the new Tax Free Savings Account (TFSA) is also a great way to eliminate any capital gains tax. Anything assets held within the TFSA are capital gains/tax except, so even when you get your dividends, guess what? No tax. Its a great investment tool and something all Canadian’s should consider if they choose to have investment portfolios.

These are just some of the options that North American’s have to help with their money management. Interest payments and taxes are two areas that are large capital expenditures for most individuals. Understanding how to manage your money and move into lower tax brackets and lower interest payment products is a key driver to reducing your overall debt and building your net worth. Speak to a bank and/or accountant to help you pick the best options. As the modo goes, you can be richer than you think. Stay positive and grow your wealth.

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