This week we started our Finance unit in MCR3U at the school that I teach at. I decided this year to began our unit with a discussion of how much University would cost, what the ways would be to obtain money for school, and how much debt you could have and how you can best deal with it.
University tuition has jumped on average 4.5% per year over the least decade, to the point where it is expected to cost almost $17000 per year for residence, books and tuition. This should be frightening for parents and their teenagers alike.
We then talked about the ways to get money for school: gifts, working, OSAP, personal loans and so on. The students sat in disbelief as I explained about OSAP and how it would be paid back and how much their loans would cost them on a monthly basis (and in return why I cannot afford a car).
We then spent the second day talking about more positive things: how to save your money to be a millionaire, how real estate and starting your own business have fundamentally been the most successful ways to become rich. Finally, the big picture is if you spend less than you make, you will end up being rich. We talked about stocks, bonds, RRSP, TFSAs, mutual funds and all the rest of the jargon.
Finally we talked about ways to reduce your debt. I gave the example of a mortgage, and by increasing your mortgage by any amount shaves the time and the interest off what you owe. I hope every time that I do this that at least a few people get something out of this and that students learn to save.
Showing posts with label math. Show all posts
Showing posts with label math. Show all posts
Friday, April 30, 2010
Monday, December 21, 2009
Financial Education This Week
This week in class we did our Financial Unit in my Grade 11 University math class. The intention was to do lessons on series (the summing of a set of terms that are added or multiplied by a fixed rate over a long period of time). This nicely relates to the concepts of compound interest and savings and borrowing, which I would discuss with my class.
One of the things that I wanted to show my class was that small amounts of savings can make huge impacts on the long term. My first example was the classic where there are three brothers/sisters who begin investing at different times. The first person invests $1000 from age 15-24. The second person invests $2000 from age 25-35. The final person invests $3000 from 35-65. You can guess I think with compound interest who comes out ahead. Depending on the interest rates (shown by me in an Excel spreadsheet), you can show the differences between a 5% or a 10% or a 12% interest rate over 30 years what the change will be.
Another example I gave was the "latte" example. Specifically, if instead of going to Tim Horton's you instead invest this $3 per day at 9% for 34 years (I word it that you are 16 today and you do this until you are 50), how much will you have? The idea is to have the students think how this small spending can affect them in the long run. (For the non-students in the audience, the answer is $247,220.76).
The other question that we like is "If _____ has 37 years until he/she retires, and is able to invest at 7.8% compounded weekly and wants to have $1,000,000 at that time, how much must (s)he save each week? How much of this is interest?". The answers are $88.85 per week savings and $829,052.60 interest earned. I like this example for the class because we can discuss the reality of 7.8% interest over 37 years, and how the small savings make an impact.
My final example I give to the class is on borrowing money. I tell them the main ways to pay back loans are to get lower interest rates, to round their payments up to the nearest $20 or $100, and to make lump sum extra payments that will go directly to the principle. I give examples with all of these to show the effect that it has (I have a neat spreadsheet for it).
The numerical example I give them to demonstrate is this: "_____ purchases a house for $220,000 when (s)he graduates high school. If the interest rate is 5.2% compounded monthly and (s)he can afford a payment of $1000, how many months will it take him/her to pay this loan?". This question generates a lot of ooh and aahs because of the answer and the follow-up. The answer is 709 months (or almost 59 years) for this to happen. The amount of interest charges would be $489,000!!!
My continuation is to ask the class if the monthly payments go up to $1100, how much more quickly the loan will be paid off. The answer is it will now take 466 months (or almost 39 years). Still not that impressive, but by raising your payments $100 per month, you have saved $218,400 in interest (charged $292,600 interest)
Here is the rest of the calculations:
Payment: $1200 - Time: 366 months (30 years) - Interest Charged: $219,200
Payment: $1500 - Time: 233 months (20 years) - Interest Charged: $129,500
Payment: $2355.01 - Time: 120 months (10 years) - Interest Charged: $62,601.20
Obviously I picked these numbers for a reason: for the $1000 payment, initially $953.33 is interest (only $46.66 paid against the loan). Additionally, to show the class that even though $1000 sounds like a lot of money on a loan you have to check the numbers.
One thing that sort of shocked me about the class was that they didn't understand the concepts of savings and borrowing and how it is related to a bank. If they are able to give you a savings account at 2% and then loan your money out to someone else at 5%, that is profit for the bank and how it is done.
Finally, the concept of tradition was still alive in my class. That being if they have banked with Royal Bank all their lives, that they will continue to go to get their mortgage through Royal without doing any comparisons of what is available. I used to have an assignment where the students would go to two "traditional" bank, and then one international and one online bank to compare rates and I will go back to this next year.
One of the things that I wanted to show my class was that small amounts of savings can make huge impacts on the long term. My first example was the classic where there are three brothers/sisters who begin investing at different times. The first person invests $1000 from age 15-24. The second person invests $2000 from age 25-35. The final person invests $3000 from 35-65. You can guess I think with compound interest who comes out ahead. Depending on the interest rates (shown by me in an Excel spreadsheet), you can show the differences between a 5% or a 10% or a 12% interest rate over 30 years what the change will be.
Another example I gave was the "latte" example. Specifically, if instead of going to Tim Horton's you instead invest this $3 per day at 9% for 34 years (I word it that you are 16 today and you do this until you are 50), how much will you have? The idea is to have the students think how this small spending can affect them in the long run. (For the non-students in the audience, the answer is $247,220.76).
The other question that we like is "If _____ has 37 years until he/she retires, and is able to invest at 7.8% compounded weekly and wants to have $1,000,000 at that time, how much must (s)he save each week? How much of this is interest?". The answers are $88.85 per week savings and $829,052.60 interest earned. I like this example for the class because we can discuss the reality of 7.8% interest over 37 years, and how the small savings make an impact.
My final example I give to the class is on borrowing money. I tell them the main ways to pay back loans are to get lower interest rates, to round their payments up to the nearest $20 or $100, and to make lump sum extra payments that will go directly to the principle. I give examples with all of these to show the effect that it has (I have a neat spreadsheet for it).
The numerical example I give them to demonstrate is this: "_____ purchases a house for $220,000 when (s)he graduates high school. If the interest rate is 5.2% compounded monthly and (s)he can afford a payment of $1000, how many months will it take him/her to pay this loan?". This question generates a lot of ooh and aahs because of the answer and the follow-up. The answer is 709 months (or almost 59 years) for this to happen. The amount of interest charges would be $489,000!!!
My continuation is to ask the class if the monthly payments go up to $1100, how much more quickly the loan will be paid off. The answer is it will now take 466 months (or almost 39 years). Still not that impressive, but by raising your payments $100 per month, you have saved $218,400 in interest (charged $292,600 interest)
Here is the rest of the calculations:
Payment: $1200 - Time: 366 months (30 years) - Interest Charged: $219,200
Payment: $1500 - Time: 233 months (20 years) - Interest Charged: $129,500
Payment: $2355.01 - Time: 120 months (10 years) - Interest Charged: $62,601.20
Obviously I picked these numbers for a reason: for the $1000 payment, initially $953.33 is interest (only $46.66 paid against the loan). Additionally, to show the class that even though $1000 sounds like a lot of money on a loan you have to check the numbers.
One thing that sort of shocked me about the class was that they didn't understand the concepts of savings and borrowing and how it is related to a bank. If they are able to give you a savings account at 2% and then loan your money out to someone else at 5%, that is profit for the bank and how it is done.
Finally, the concept of tradition was still alive in my class. That being if they have banked with Royal Bank all their lives, that they will continue to go to get their mortgage through Royal without doing any comparisons of what is available. I used to have an assignment where the students would go to two "traditional" bank, and then one international and one online bank to compare rates and I will go back to this next year.
Friday, October 2, 2009
Happiness for the future...
At the end of math class, one of the girls in my class was complaining that all she had to do is work this weekend at Tim Horton's. She said that she had to work from 6am - 4pm every day this weekend and had tonnes of hours in the week. I asked her if she was saving any of the money, and she said that her mother made her put a percentage of it into savings and a percentage into saving for school and some she was allowed to spend. I told her that if she would save 10-20% out of every paycheque, she would be very rich in the future. I didn't get into the math of it (that will come later in the semester), but it sounded good that her mother was helping her get a head start in her financial life.
Saturday, September 19, 2009
My first money lesson of the year...
In my Grade 11 University math class, we are in the sequences unit. A sequence is an ordered list of numbers. Specificially we deal with sequences where each term in the sequence is multiplied by a common number to get the next number in the sequence. An example is 2, 4, 8, 16, 32, ... (the sequence is doubling each time).
A great application of this is compound interest. If you multiply the interest each time, you can find out the future value of your money. So in our class yesterday, we started talking about savings and borrowing and compound interest.
First of all, the class quickly discovered that this is the way to get me off topic, as I got a lot of great questions from the class and happily answered them all to the best of my ability. We talked about more frequent compounding periods than annually, although the interest rate is listed as annually and how the more frequent that compound period, the more money that is charged/earned. When I explained that credit cards charge daily interest, it prompted the response, "those guys are jerks...I'm never getting a credit card!". We'll see if this person in the future lives by these words, but not getting a credit card immediately should be good advice for any teenager.
Then we talked (briefly) about purchasing a car. I told the class that I don't have a car, getting a cheer from the vegan in the class. We talked about a person that I know that purchased a fancy automobile immediately after getting their first job, and then was saddled with lease payments, insurance and all the rest, when they really couldn't afford it. I didn't have time to get into much more than that, but hopefully they will think about that (I'll return to planning and deciding if you can afford something when I get to the finance unit in the course).
Then I wrote on the board that the interest rate on mortgages is charged every six months. A student asked "what's a second mortgage". After first explaining what a first mortgage was, I explained that a second mortgage is borrowing against the equity in your home. Then I (quickly) explained this was one of the problems in the United States, where people would leverage their homes and end up borrowing more money than their home was worth. Then when they tried to sell their home, they wouldn't have enough money to cover their loans. Someone asked, "If you lose your job, and you still owe half the money on your house, or on your farm, what happens?" I answered as honestly as I could, and I'm not sure if this is exactly right, but I would think that you would be forced to sell your house if it got foreclosed. The portion that you owe the bank would be taken out of how much money that you got for the sale of your house.
My last math lesson of the day was in the staff room when a fellow teacher asked me what a reverse mortgage was. I tried to explain that it was when the bank gives you money in exchange for equity in your house. It is intended for retirees who have a lot of assets in their house, but have little or no cash. The problem is that when they die, a large amount of the value of the house can go to the bank.
All in all, it was a fun lesson for me, and although I have an excellent class, there may be some financial strain at home for me to be getting questions about foreclosures and second mortgages. I explained to them that one of my goals was to be a millionaire and that I would explain how I would do that when we talked about savings and borrowing later in the course. Every year I hope that some of this financial stuff sinks in, and I hope that because I am passionate about it that some will take an interest.
A great application of this is compound interest. If you multiply the interest each time, you can find out the future value of your money. So in our class yesterday, we started talking about savings and borrowing and compound interest.
First of all, the class quickly discovered that this is the way to get me off topic, as I got a lot of great questions from the class and happily answered them all to the best of my ability. We talked about more frequent compounding periods than annually, although the interest rate is listed as annually and how the more frequent that compound period, the more money that is charged/earned. When I explained that credit cards charge daily interest, it prompted the response, "those guys are jerks...I'm never getting a credit card!". We'll see if this person in the future lives by these words, but not getting a credit card immediately should be good advice for any teenager.
Then we talked (briefly) about purchasing a car. I told the class that I don't have a car, getting a cheer from the vegan in the class. We talked about a person that I know that purchased a fancy automobile immediately after getting their first job, and then was saddled with lease payments, insurance and all the rest, when they really couldn't afford it. I didn't have time to get into much more than that, but hopefully they will think about that (I'll return to planning and deciding if you can afford something when I get to the finance unit in the course).
Then I wrote on the board that the interest rate on mortgages is charged every six months. A student asked "what's a second mortgage". After first explaining what a first mortgage was, I explained that a second mortgage is borrowing against the equity in your home. Then I (quickly) explained this was one of the problems in the United States, where people would leverage their homes and end up borrowing more money than their home was worth. Then when they tried to sell their home, they wouldn't have enough money to cover their loans. Someone asked, "If you lose your job, and you still owe half the money on your house, or on your farm, what happens?" I answered as honestly as I could, and I'm not sure if this is exactly right, but I would think that you would be forced to sell your house if it got foreclosed. The portion that you owe the bank would be taken out of how much money that you got for the sale of your house.
My last math lesson of the day was in the staff room when a fellow teacher asked me what a reverse mortgage was. I tried to explain that it was when the bank gives you money in exchange for equity in your house. It is intended for retirees who have a lot of assets in their house, but have little or no cash. The problem is that when they die, a large amount of the value of the house can go to the bank.
All in all, it was a fun lesson for me, and although I have an excellent class, there may be some financial strain at home for me to be getting questions about foreclosures and second mortgages. I explained to them that one of my goals was to be a millionaire and that I would explain how I would do that when we talked about savings and borrowing later in the course. Every year I hope that some of this financial stuff sinks in, and I hope that because I am passionate about it that some will take an interest.
Monday, September 14, 2009
Kids and Money
As you have probably read, I teach high school, and last week I had cafeteria duty. Generally, this involves telling grade 9's to pick up their garbage and to push in their chairs and such, but I started looking at the lines and doing some calculations.
There was a lineup of at least 200 students at the beginning of lunch going to the cafeteria, assuming that they spend $5 there (pretty reasonable considering the food there), that is $1000 per day that the cafeteria earns (or the students waste). On top of this, there is a 25 cent fee for using Interact at the cafeteria.
This pains me when I think of the future of our economy. Teenagers have more disposable income than anyone (if you don't believe me check out the number of hats, cell phones and ipods that the vice-principal confiscates and then aren't even collected at the end of the year). Perhaps some thought should be to teaching them about savings.
Theoretically, what's wrong with getting your kids to save 10-20% for their retirement already (no matter what their age). You don't have to tell them that, just tell them its a savings account, and then when they are 18 years old, roll it over to an RRSP. In this way, they will have some RRSPs started for themselves when they get started (and even potentially for their First Time Home Buyers credit if it is still there in the future), and they get a big tax break for their first income tax that they pay.
In all my math classes, I try to give these sorts of ideas to the kids, of the power of savings, and that they can save $40 per week at their age to be a millionaire, when I have to save $100 per week for it to happen at my age. Some are wowed by the numbers, but I hope that these ideas stick with at least one from each class. I also talk about credit cards, mortgages, buying your first car, how much university will cost, and how much it costs when you finally move out on your own. These are things that I enjoy discussing with the class from time to time, but ultimately these are lessons that if they aren't shown at home, you have to experience for yourself before you really understand.
There was a lineup of at least 200 students at the beginning of lunch going to the cafeteria, assuming that they spend $5 there (pretty reasonable considering the food there), that is $1000 per day that the cafeteria earns (or the students waste). On top of this, there is a 25 cent fee for using Interact at the cafeteria.
This pains me when I think of the future of our economy. Teenagers have more disposable income than anyone (if you don't believe me check out the number of hats, cell phones and ipods that the vice-principal confiscates and then aren't even collected at the end of the year). Perhaps some thought should be to teaching them about savings.
Theoretically, what's wrong with getting your kids to save 10-20% for their retirement already (no matter what their age). You don't have to tell them that, just tell them its a savings account, and then when they are 18 years old, roll it over to an RRSP. In this way, they will have some RRSPs started for themselves when they get started (and even potentially for their First Time Home Buyers credit if it is still there in the future), and they get a big tax break for their first income tax that they pay.
In all my math classes, I try to give these sorts of ideas to the kids, of the power of savings, and that they can save $40 per week at their age to be a millionaire, when I have to save $100 per week for it to happen at my age. Some are wowed by the numbers, but I hope that these ideas stick with at least one from each class. I also talk about credit cards, mortgages, buying your first car, how much university will cost, and how much it costs when you finally move out on your own. These are things that I enjoy discussing with the class from time to time, but ultimately these are lessons that if they aren't shown at home, you have to experience for yourself before you really understand.
Monday, September 7, 2009
Links (some money and some math)
Here are a few good links that I found around the web:
Internet Teens Failing Math - The basis of this article is that with the compressed time schedule in high school (four years of high school math rather than five) that students aren't learning as much and having a much more difficult time in University math programs. Additionally, less time leads to less practice of the fundamentals.
Be Suspicious When Managing Your Money - Just good common sense advice, that you have to rely on yourself (and think!!!) when managing your money. Do some reading, use some common sense and if something sounds too good to be true it likely is!
Flipping Houses for Profit - One of my favourite blogs, MillionDollarJourney discusses flipping properties and if it is worthwhile and the difficulties that can arise. A related link (from the same site) is Converting Your Residence into a Rental Property. I hope to have some rental property in the next five years and one of my philosophies is to be well read upon the subject so posts like this peak my interest.
What are REITs - For those that are interested in real estate, but less risk (and less cash), Real Estate Investment Trusts are another option for you (to diversify your portfolio). One of my fears with a rental property is that all of a sudden $200,000 of my portfolio is in real estate, and with that chunk in there it is difficult (impossible) to be diversified. This is a good way to test the waters.
Internet Teens Failing Math - The basis of this article is that with the compressed time schedule in high school (four years of high school math rather than five) that students aren't learning as much and having a much more difficult time in University math programs. Additionally, less time leads to less practice of the fundamentals.
Be Suspicious When Managing Your Money - Just good common sense advice, that you have to rely on yourself (and think!!!) when managing your money. Do some reading, use some common sense and if something sounds too good to be true it likely is!
Flipping Houses for Profit - One of my favourite blogs, MillionDollarJourney discusses flipping properties and if it is worthwhile and the difficulties that can arise. A related link (from the same site) is Converting Your Residence into a Rental Property. I hope to have some rental property in the next five years and one of my philosophies is to be well read upon the subject so posts like this peak my interest.
What are REITs - For those that are interested in real estate, but less risk (and less cash), Real Estate Investment Trusts are another option for you (to diversify your portfolio). One of my fears with a rental property is that all of a sudden $200,000 of my portfolio is in real estate, and with that chunk in there it is difficult (impossible) to be diversified. This is a good way to test the waters.
Friday, August 21, 2009
Paying Down Your Mortgage
As September rolls around, my property taxes will rise on my condo. This always makes me think about my mortgage and how I can improve it.
Before I begin, here is a list of TD's mortgage rates. Here are BMO's. Here are Scotia's. Here are Royal Bank's. Here are CIBC's. Here are ING Direct's.
Fixed vs. Variable - a Fixed mortgage is a mortgage where the interest rate is locked in for a set amount of time. If you get a five-year fixed mortgage, with a term of 25 years, you pay the mortgage over 25 years, but the interest rate will stay the same for the next five years. The advantage to this is that when rates are low (like now), you can lock in a nice low rate for a relatively long time. These rates are mostly on average higher than a variable rate mortgage. A variable rate mortgage is generally prime plus a percentage (now most banks have prime +0.4%). Historically there have been far better deals with variable rate mortgages, but if mortgage rates shoot up, you can end up paying more (although this rarely happens). Your payments will not increase until the interest that you are charged is more than your payments.
Open vs. Closed - An open mortgage is a loan where you can make extra payments (or increase your regular payments) with no penalty. A closed mortgage you have your payments and you cannot increase them or make extra payments without paying a penalty. The interest rates on closed mortgages tend to be lower.
What You Can Do To Pay Down Your Mortgage More Quickly - The harsh reality of mortgages is this: if it takes you 25 years to pay off, you will be paying more in interest than the value of your house. A quick example, a $200,000 mortgage at 5% over 25 years (with monthly payments) charges 1169.18 per month, which is a total payment of $350,754 or $150,754 in interest!
Pay A Big Down Payment - You can get away with putting down only 5% of the value of your home according to the Canadian Mortgage and Housing Corporation, if you pay less than 20% of the value of your home you must take out CMHC housing insurance which is added onto the principle of your house. In order to help people with this, if you have RRSPs take advantage of the First Time Home Buyers Plan where you can withdraw up to $25,000 from your RRSP to go towards the purchase of your home. This money must be repaid back into your RRSP over 15 years.
Get A Lower Interest Rate - feel free to renegotiate with your mortgage company (or another company) when you hear that interest rates drop. If it is financially beneficial to you to switch mortgages because rates fall, then do it!
Pay Your Mortgage Whenever You Get Paid - if you get paid once a month, then it is fine to make monthly mortgage payments. But if you get paid every other week, why would you only pay your mortgage at the beginning of the month (other than habits from renting). The cost savings can be tremendous because of the savings in interest. If you use my previous example of a $200,000 mortgage over 25 years at 5%, the bi-weekly payments drop to $539.32, saving you only $200 over 25 years, but you have lowered your payments as well!
Each Time You Get A Raise Increase Your Payments - This is what I do. Since I have other loans on top of my mortgage I don't do this as aggressively as I should, but I will describe my scenario. I will get my property tax increase, which goes directly to my mortgage. Let's say it goes up $10 (as it did last year), I will then top up my mortgage $15 (for a total increase of $25 each pay). Since I do this when I get a raise, I don't feel the pinch at all! By doing this last year (I haven't run the numbers this year because I don't know what my increases will be), I saved 2 and a half years on my mortgage!
If you have an open mortgage, make a lump sum payment - If money falls into your lap (be it tax returns, inheritance, good fortune at work), putting down a lump sum payment goes right against the principle of your mortgage. As described previously, I work summer school in the summer and always put a few hundred bucks towards my mortgage extra.
Finally a word on purchasing a house and how you know if you can afford it. My recommendation is to take whatever you are paying for your current rent and double it for the next six months. Lets say you are paying $900 in rent. Take the extra $900 and save it towards your down payment for the next six months. If you are able to do this, you will be able to comfortable afford your house and there will be no pinch. If you are unable to do this (or hope that your mortgage and insurance and utilities and all that will work out to about the same as renting) you probably aren't ready for home ownership yet.
Before I begin, here is a list of TD's mortgage rates. Here are BMO's. Here are Scotia's. Here are Royal Bank's. Here are CIBC's. Here are ING Direct's.
Fixed vs. Variable - a Fixed mortgage is a mortgage where the interest rate is locked in for a set amount of time. If you get a five-year fixed mortgage, with a term of 25 years, you pay the mortgage over 25 years, but the interest rate will stay the same for the next five years. The advantage to this is that when rates are low (like now), you can lock in a nice low rate for a relatively long time. These rates are mostly on average higher than a variable rate mortgage. A variable rate mortgage is generally prime plus a percentage (now most banks have prime +0.4%). Historically there have been far better deals with variable rate mortgages, but if mortgage rates shoot up, you can end up paying more (although this rarely happens). Your payments will not increase until the interest that you are charged is more than your payments.
Open vs. Closed - An open mortgage is a loan where you can make extra payments (or increase your regular payments) with no penalty. A closed mortgage you have your payments and you cannot increase them or make extra payments without paying a penalty. The interest rates on closed mortgages tend to be lower.
What You Can Do To Pay Down Your Mortgage More Quickly - The harsh reality of mortgages is this: if it takes you 25 years to pay off, you will be paying more in interest than the value of your house. A quick example, a $200,000 mortgage at 5% over 25 years (with monthly payments) charges 1169.18 per month, which is a total payment of $350,754 or $150,754 in interest!
Pay A Big Down Payment - You can get away with putting down only 5% of the value of your home according to the Canadian Mortgage and Housing Corporation, if you pay less than 20% of the value of your home you must take out CMHC housing insurance which is added onto the principle of your house. In order to help people with this, if you have RRSPs take advantage of the First Time Home Buyers Plan where you can withdraw up to $25,000 from your RRSP to go towards the purchase of your home. This money must be repaid back into your RRSP over 15 years.
Get A Lower Interest Rate - feel free to renegotiate with your mortgage company (or another company) when you hear that interest rates drop. If it is financially beneficial to you to switch mortgages because rates fall, then do it!
Pay Your Mortgage Whenever You Get Paid - if you get paid once a month, then it is fine to make monthly mortgage payments. But if you get paid every other week, why would you only pay your mortgage at the beginning of the month (other than habits from renting). The cost savings can be tremendous because of the savings in interest. If you use my previous example of a $200,000 mortgage over 25 years at 5%, the bi-weekly payments drop to $539.32, saving you only $200 over 25 years, but you have lowered your payments as well!
Each Time You Get A Raise Increase Your Payments - This is what I do. Since I have other loans on top of my mortgage I don't do this as aggressively as I should, but I will describe my scenario. I will get my property tax increase, which goes directly to my mortgage. Let's say it goes up $10 (as it did last year), I will then top up my mortgage $15 (for a total increase of $25 each pay). Since I do this when I get a raise, I don't feel the pinch at all! By doing this last year (I haven't run the numbers this year because I don't know what my increases will be), I saved 2 and a half years on my mortgage!
If you have an open mortgage, make a lump sum payment - If money falls into your lap (be it tax returns, inheritance, good fortune at work), putting down a lump sum payment goes right against the principle of your mortgage. As described previously, I work summer school in the summer and always put a few hundred bucks towards my mortgage extra.
Finally a word on purchasing a house and how you know if you can afford it. My recommendation is to take whatever you are paying for your current rent and double it for the next six months. Lets say you are paying $900 in rent. Take the extra $900 and save it towards your down payment for the next six months. If you are able to do this, you will be able to comfortable afford your house and there will be no pinch. If you are unable to do this (or hope that your mortgage and insurance and utilities and all that will work out to about the same as renting) you probably aren't ready for home ownership yet.
Thursday, August 20, 2009
Inflation and Pensions
At about Christmas, when there was a shortfall in pension funds, the Ontario Teachers Pension Plan announced that retired teacher's pensions would no longer be indexed to inflation. Depending on the assets held by the Pension Plan, from years after 2009, it may only be indexed to half of inflation.
Lets run some numbers to see how damaging this could be. To make the numbers convenient, I will use a salary of $100,000 at retirement (it sounds like a lot, but 30 years from now when I retire that probably is what it will be at). As well, we will use various inflation rates, all indexed to half of that. What the index means is that your money that you get will be increased by half of inflation. So if inflation is 2%, you will get 1% extra money. The problem is that the cost of everything has gone up 2%, so that although you are making more money, you have less money to spend.
Scenario 1: $100,000 at retirement and 2% inflation
- after 5 years: salary is $105,101.01
- spending power (relative to $100,000): $95,193.22 (you can purchase five years from now the same as if you made $95,193.22 in the first year)
- after 10 years: salary is $110,462.21, spending power: $90,617.49
- after 20 years: salary is $122,019.00, spending power: $82,115.29
- after 30 years: salary is $134,784.89, spending power: $74,410.81
So after 30 years, your salary will only purchase about 74% of what it did when you started retirement. If the average teacher retires at 55 or so, this is at 85 years of age, where people will still be around (as we continue to live longer).
Scenario 2: $100,000 at retirement and 4% inflation
- after 5 years: salary is $110,408.08, spending power: $90,747.39
- after 10 years: salary is $121,899.44, spending power: $82,350.90
- after 20 years: salary is $148,594.74, spending power: $67,816.70
- after 30 years: salary is $181,136.16, spending power: $55,847.66
So after 30 years in the second scenario, you will only be able to purchase about 56% of what you could when retirement started. This is where things start to get scary. Since the early 90s, governments have tried to keep inflation at 2% (or less), but any period of hyperinflation (in the 8-10% range) and this could cripple lots of people's retirements.
Scenario 3: $100,000 at retirement and 6, 8, 10% inflation
- after 30 years at 6% inflation: salary is $242,726.25, spending power: $42,261.10
- after 30 years at 8% inflation: salary is $324,339.75, spending power: $32,232.02
- after 30 years at 10% inflation: salary is $432,194.24, spending power: $24,768.43
OK, this is starting to get a bit ridiculous. No one expects 10% inflation over the next 30 years. It is possible though to expect inflation in the 2-4% range, where at least one third of your money will have eroded.
Even if you aren't a teacher, please take a look at your pension to see if this holds true. Inflation is very dangerous to your spending power in retirement, where it can be difficult to make more money (unless you have saved for your retirement outside of your pension).
Lets run some numbers to see how damaging this could be. To make the numbers convenient, I will use a salary of $100,000 at retirement (it sounds like a lot, but 30 years from now when I retire that probably is what it will be at). As well, we will use various inflation rates, all indexed to half of that. What the index means is that your money that you get will be increased by half of inflation. So if inflation is 2%, you will get 1% extra money. The problem is that the cost of everything has gone up 2%, so that although you are making more money, you have less money to spend.
Scenario 1: $100,000 at retirement and 2% inflation
- after 5 years: salary is $105,101.01
- spending power (relative to $100,000): $95,193.22 (you can purchase five years from now the same as if you made $95,193.22 in the first year)
- after 10 years: salary is $110,462.21, spending power: $90,617.49
- after 20 years: salary is $122,019.00, spending power: $82,115.29
- after 30 years: salary is $134,784.89, spending power: $74,410.81
So after 30 years, your salary will only purchase about 74% of what it did when you started retirement. If the average teacher retires at 55 or so, this is at 85 years of age, where people will still be around (as we continue to live longer).
Scenario 2: $100,000 at retirement and 4% inflation
- after 5 years: salary is $110,408.08, spending power: $90,747.39
- after 10 years: salary is $121,899.44, spending power: $82,350.90
- after 20 years: salary is $148,594.74, spending power: $67,816.70
- after 30 years: salary is $181,136.16, spending power: $55,847.66
So after 30 years in the second scenario, you will only be able to purchase about 56% of what you could when retirement started. This is where things start to get scary. Since the early 90s, governments have tried to keep inflation at 2% (or less), but any period of hyperinflation (in the 8-10% range) and this could cripple lots of people's retirements.
Scenario 3: $100,000 at retirement and 6, 8, 10% inflation
- after 30 years at 6% inflation: salary is $242,726.25, spending power: $42,261.10
- after 30 years at 8% inflation: salary is $324,339.75, spending power: $32,232.02
- after 30 years at 10% inflation: salary is $432,194.24, spending power: $24,768.43
OK, this is starting to get a bit ridiculous. No one expects 10% inflation over the next 30 years. It is possible though to expect inflation in the 2-4% range, where at least one third of your money will have eroded.
Even if you aren't a teacher, please take a look at your pension to see if this holds true. Inflation is very dangerous to your spending power in retirement, where it can be difficult to make more money (unless you have saved for your retirement outside of your pension).
Monday, August 10, 2009
More Links about Education and Money
I am just going to post a few links (with a running commentary) for people who want more information about where money matters are taught in schools. Some say that they are, some say that they aren't. I teach Grade 11 math and that is my favourite unit. We generally discuss the mathematics side of compound interest and mortgages, but I always leave one lesson open to discuss financial matters (saving for university, how you will pay it back, budgets, loans, mutual funds, why not to go to a "Cash Mart", etc.). There are also high school electives in business and marketing, but I am not sure if they talk about saving and spending.
Learning How To Avoid The Debt Trap - a post from the Toronto star explaining how an MBA ended up with a high paying job and in his parents basement at 30 years old. They also talk about the importance of talking about compound interest (which is done in the mandatory Grade 11 math course).
Money Instructor - A link for all teachers showing how they can put financial ideas into their classrooms. These are for youngers students generally, but these sound financial ideas (save some money, spend less than you make, if you can't afford something you have to save before you can buy it) can be reinforced from a young age and hopefully will stick.
Young and Out of Work - A depressing article stating that for young people the unemployment rate is 21%. For a comparable read, check out "The Tipping Point", who discusses that unfortunately when you graduate school and how the economy is doing can greatly contribute to your success. They discuss in this article that you can ride out the recession while in school. As well, students think that because they have a University degree in whatever and a $20,000 student loan that they are entitled to a high paying job. Unfortunately, those days are over.
Tips To Teaching Money Management Skills - a nice post and suggestions on how to teach financial management to your children and students.
A Cartoon Buffett, Teaching Children About Money - Finally, Warren Buffet is creating a cartoon starring himself teaching children about money. I can't wait for the action figures!
Learning How To Avoid The Debt Trap - a post from the Toronto star explaining how an MBA ended up with a high paying job and in his parents basement at 30 years old. They also talk about the importance of talking about compound interest (which is done in the mandatory Grade 11 math course).
Money Instructor - A link for all teachers showing how they can put financial ideas into their classrooms. These are for youngers students generally, but these sound financial ideas (save some money, spend less than you make, if you can't afford something you have to save before you can buy it) can be reinforced from a young age and hopefully will stick.
Young and Out of Work - A depressing article stating that for young people the unemployment rate is 21%. For a comparable read, check out "The Tipping Point", who discusses that unfortunately when you graduate school and how the economy is doing can greatly contribute to your success. They discuss in this article that you can ride out the recession while in school. As well, students think that because they have a University degree in whatever and a $20,000 student loan that they are entitled to a high paying job. Unfortunately, those days are over.
Tips To Teaching Money Management Skills - a nice post and suggestions on how to teach financial management to your children and students.
A Cartoon Buffett, Teaching Children About Money - Finally, Warren Buffet is creating a cartoon starring himself teaching children about money. I can't wait for the action figures!
Sunday, August 2, 2009
Two Good Links From The Toronto Star and more!
My girlfriend was reading the Toronto Star online and found these excellent articles that she thought that I'd love (and I do). Here they are:
Teenagers Lacking Education On The Financial Facts of Life - A good article discussing how there is no formal financial education in the Ontario curriculum. As a math teacher, I totally agree and would love to teach a course like this. As mentioned in previous posts, I try to do this as much as possible already, but a formal course on finance would be great! As the article says, there is a formal Grade 10 course in Careers and Civics, you could throw a financial course in there as well and it would be great!
Frugal or cheap - This article discusses when even frugal people put a limit on the quality of the things that they purchase. My favourite quotes are "The distinction between frugality and a tightwad is that, for a tightwad, it hurts to spend" (my girlfriend thinks this makes me a tightwad, but it only hurts me to write cheques) and that a spendthrift is "...unable to feel distress even when financial situations take a turn for the worse".
A third good link (although not from the Toronto Star) is Million Dollar Journey's Paying Off Debt: Lowest Balance or Highest Interest First? where the consensus is that it is better to pay off debt in the way that motivates the individual the most. I couldn't agree more.
All articles are great reads, so take a look!
Teenagers Lacking Education On The Financial Facts of Life - A good article discussing how there is no formal financial education in the Ontario curriculum. As a math teacher, I totally agree and would love to teach a course like this. As mentioned in previous posts, I try to do this as much as possible already, but a formal course on finance would be great! As the article says, there is a formal Grade 10 course in Careers and Civics, you could throw a financial course in there as well and it would be great!
Frugal or cheap - This article discusses when even frugal people put a limit on the quality of the things that they purchase. My favourite quotes are "The distinction between frugality and a tightwad is that, for a tightwad, it hurts to spend" (my girlfriend thinks this makes me a tightwad, but it only hurts me to write cheques) and that a spendthrift is "...unable to feel distress even when financial situations take a turn for the worse".
A third good link (although not from the Toronto Star) is Million Dollar Journey's Paying Off Debt: Lowest Balance or Highest Interest First? where the consensus is that it is better to pay off debt in the way that motivates the individual the most. I couldn't agree more.
All articles are great reads, so take a look!
Tuesday, July 21, 2009
What A Math Teacher Can Do For The Future...
As a teacher, I hope that I have some influence over students’ decision-making in the long term. So I bring my love of numbers and of money into the classroom every day. I just thought that I would share with you some questions off of my final exam from my MCF3M Summer School class.
3) Mr. Sadler purchased a house this spring for $217,000. He makes monthly payments at 5.25%.
a) Give three suggestions that I can use to pay off my loan sooner (3 marks)
We discuss this in class during the lessons, and I hope that these stick with them. Some solutions that I will accept are:
- pay bigger payments: I talk about rounding up your payments from the minimum (ex. if my bill is for $191.28, I will pay $200)
- pay more frequently: I talk about linking your payments to how frequently you get paid. Of course it is cheaper if you may every day on your mortgage, but if you get paid every other week, it makes sense to have your mortgage come out this day (rather than once per month)
- put down a lump sum payment: we talked about how the no-deposit loan has really hurt the United States, and that a 20 or 25% deposit will lower your interest rate on your loan as well.
- find a lower interest rate: I took this for a mark, because if you negotiate your mortgage to a lower rate (either at another bank or your current bank), you will save tonnes of money. Additionally I talked about credit cards in class and how you can call up your company and ask for a lower rate!
b) His mortgage is for 30 years. What are his monthly payments?
This is just a straight calculation question for my class, which most of them are happy to do.
c) Mr. Sadler is a smart guy and wants to pay off his mortgage in 11 years. What will his new monthly payments be, and how much interest will he save (as compared to paying it off in 30 years)?
This (along with part a) are the questions that I hope will stick with the students through the years. The answer is that for a 30 year mortgage you pay $431,380.80 and for a 11 year mortgage you pay $286,117.92 for a savings of 145,262.88. The only problem is that the 30 year mortgage payments are $1198.28 and the 11 year mortgage rates are $2167.56 (almost double) so it is not always feasible.
I also discuss with my class about slowly raising your minimum payments with raises, and slowly raising your savings, etc. We'll talk more about this in future posts, but I'd thought I'd share this as I finish marking these exams!
3) Mr. Sadler purchased a house this spring for $217,000. He makes monthly payments at 5.25%.
a) Give three suggestions that I can use to pay off my loan sooner (3 marks)
We discuss this in class during the lessons, and I hope that these stick with them. Some solutions that I will accept are:
- pay bigger payments: I talk about rounding up your payments from the minimum (ex. if my bill is for $191.28, I will pay $200)
- pay more frequently: I talk about linking your payments to how frequently you get paid. Of course it is cheaper if you may every day on your mortgage, but if you get paid every other week, it makes sense to have your mortgage come out this day (rather than once per month)
- put down a lump sum payment: we talked about how the no-deposit loan has really hurt the United States, and that a 20 or 25% deposit will lower your interest rate on your loan as well.
- find a lower interest rate: I took this for a mark, because if you negotiate your mortgage to a lower rate (either at another bank or your current bank), you will save tonnes of money. Additionally I talked about credit cards in class and how you can call up your company and ask for a lower rate!
b) His mortgage is for 30 years. What are his monthly payments?
This is just a straight calculation question for my class, which most of them are happy to do.
c) Mr. Sadler is a smart guy and wants to pay off his mortgage in 11 years. What will his new monthly payments be, and how much interest will he save (as compared to paying it off in 30 years)?
This (along with part a) are the questions that I hope will stick with the students through the years. The answer is that for a 30 year mortgage you pay $431,380.80 and for a 11 year mortgage you pay $286,117.92 for a savings of 145,262.88. The only problem is that the 30 year mortgage payments are $1198.28 and the 11 year mortgage rates are $2167.56 (almost double) so it is not always feasible.
I also discuss with my class about slowly raising your minimum payments with raises, and slowly raising your savings, etc. We'll talk more about this in future posts, but I'd thought I'd share this as I finish marking these exams!
Thursday, July 16, 2009
How to keep your spending down...
There are two ways to increase your cash flow in a month: either get more money in, or spend less money. I try to tend to do both. To get more money in, I teach summer school, rent out rooms in my condo, and tutor on the side. This post will be about things that I try to do to limit my spending in a month:
Pay for things in cash: This was discussed in a previous post, but by spending cash rather than on credit you tend to spend less. Additionally, by only hanging onto large bills you will be less willing to break them. As well, I save my change and put it in a big container on my front table.
Leave your wallet at home: For me, I tend to be a spender, unless I don't have my wallet with me. I know that if I am going for a walk and will be going by WalMart I will go in there and pick something up (or the video game store or the beer store or wherever). This goes doubly so at work: I never bring my wallet, and then there is no temptation to spend.
Pack your own lunch/coffee: This relates to above, but you can spend a horrendous amount in a day/week/month on this stuff. In math class, I always give my class a question that says instead of spending $3 per day at Tim Horton's, Billy saves this money in an account that earns 5% compounded daily over the next 30 years. How much will he have? I will spare you the math here, but the answer is $76,238. If you change the number to 8%, it is $137,153. If you change the number to 10%, it is $208,896.
Cut back your cable/internet:I did this when my girlfriend moved in and saved almost $50 per month!
Go to one car (or less!): I do not have a car, and walk everywhere I go. I bought my house so that it is a 20-30 minute walk from my school. Because of this, I am able to not spend a huge amount of my monthly money on gas, insurance, and the payments for the car initially
Cell Phones: As well, I do not own a cell phone. If you have to have a cell phone, please get the pre-paid option, so that you will not end up with large bills at the end of the month.
Shop Around: Finally, I try to shop around. That is, I buy things when they are on sale. Not that I will walk into a store when it says "Sale", but when I decide to buy something I shop around for a few weeks until I buy it. If you are looking for a hardwood floor, there is nothing wrong with putting a few weeks planning into the purchase, and then finally picking the best price for the best product.
Eat At Home:Although my girlfriend wants me to point out that I took her out for lunch today (it's true), we generally eat at home. The savings here are enormous (as compared to before where we would probably eat out once or twice a week). Two meals and a drink each and you are looking probably at $40-50 for the evening.
I hope this helps some people out (or at least gives them some ideas). If you have any agreements (or suggestions or contentions), please feel free to leave me know by leaving a comment!
Pay for things in cash: This was discussed in a previous post, but by spending cash rather than on credit you tend to spend less. Additionally, by only hanging onto large bills you will be less willing to break them. As well, I save my change and put it in a big container on my front table.
Leave your wallet at home: For me, I tend to be a spender, unless I don't have my wallet with me. I know that if I am going for a walk and will be going by WalMart I will go in there and pick something up (or the video game store or the beer store or wherever). This goes doubly so at work: I never bring my wallet, and then there is no temptation to spend.
Pack your own lunch/coffee: This relates to above, but you can spend a horrendous amount in a day/week/month on this stuff. In math class, I always give my class a question that says instead of spending $3 per day at Tim Horton's, Billy saves this money in an account that earns 5% compounded daily over the next 30 years. How much will he have? I will spare you the math here, but the answer is $76,238. If you change the number to 8%, it is $137,153. If you change the number to 10%, it is $208,896.
Cut back your cable/internet:I did this when my girlfriend moved in and saved almost $50 per month!
Go to one car (or less!): I do not have a car, and walk everywhere I go. I bought my house so that it is a 20-30 minute walk from my school. Because of this, I am able to not spend a huge amount of my monthly money on gas, insurance, and the payments for the car initially
Cell Phones: As well, I do not own a cell phone. If you have to have a cell phone, please get the pre-paid option, so that you will not end up with large bills at the end of the month.
Shop Around: Finally, I try to shop around. That is, I buy things when they are on sale. Not that I will walk into a store when it says "Sale", but when I decide to buy something I shop around for a few weeks until I buy it. If you are looking for a hardwood floor, there is nothing wrong with putting a few weeks planning into the purchase, and then finally picking the best price for the best product.
Eat At Home:Although my girlfriend wants me to point out that I took her out for lunch today (it's true), we generally eat at home. The savings here are enormous (as compared to before where we would probably eat out once or twice a week). Two meals and a drink each and you are looking probably at $40-50 for the evening.
I hope this helps some people out (or at least gives them some ideas). If you have any agreements (or suggestions or contentions), please feel free to leave me know by leaving a comment!
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