I wrote recently about some key contributors to our debt journey, acknowledging that my worst fear was the impact it was having on the ability of my adult children to manage their finances responsibly and proactively.
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The Early Days after Debt Acknowledgement
My oldest is the most frugal of all of them, and has been quite capable of managing her finances well, (mostly) without my help. In fact when we first acknowledged our debt crisis, I was quite overwhelmed and anxious. I found it anxiety provoking to even log into our bank accounts or credit card statements on line! Can you believe that? She gave me some sage advice suggesting that I just start with one of them, and log in every day, until the anxiousness subsided.
Later I added logging in to see my credit card balances to my routine, and soon I was creating budgets on excel and living and breathing our financial numbers until I was bleary-eyed. The new found financial good habits, for me, had begun.
More than a year later, after that initial shock, I had built up routines and coping strategies and I began to talk more openly about our finances with all of our children.
Good Personal Finance Habits
Even though I knew my oldest was probably in the best position, I still wanted to satisfy my curiosity urgent need to know exactly how they were managing things. Were there any things they were not doing or neglecting that, after twelve months of debt wrangling, I might be able to offer advice on.
She assured me that they had all of the following in place:
An emergency fund of cash equal to about 3 months of expenses. We discussed the merits of having up to six months of expenses.
Fully topped up TFSA’s (Tax Free Savings Accounts), for both her and her husband. This equated to about 40K at the time, more than enough to be considered the additional component of their emergency fund.
Regular contributions to their RRSP’s to obtain the maximum company match.
I also knew that she had good frugal habits in place such as:
Managing household expenses by minimizing hydro use (her husband always jokes that he walks around in the dark half the time).
Selling unwanted stuff on Kijiji to make a few extra dollars from household clutter.
More recently, they just moved into a new home, and I helped them do a few different sensitivity analyses for the mortgage repayment. I use the following Canadian Mortgage Calculator (from Vertex42 – can also be used for US, see note below (*). We created the following worksheets by making copies of the master and tweaking the variables:
To illustrate the impact on total interest paid and final payment date of switching to accelerated bi-weekly payments from monthly mortgage payments. With accelerated bi-weekly, you pay half of your budgeted monthly mortgage amount exactly every two weeks on the same day of the week, thereby fitting in 26 payments a year, instead of 24 if you just paid it twice per month, or 12 if only once per month. Your payments are less if you pay biweekly, but the biggest savings comes from taking your monthly payment and dividing by 2 and paying that every two weeks having the equivalent of 13 months of payments (26/2) instead of 12.
We also wanted to see the impact of making prepayments, both annual of $3,000 plus an extra bi-weekly payment of $50. These prepayments come right off the principal. (Note: You need to check the terms of your mortgage with respect to prepayments. There is often maximum annual amounts. Some can be made at any time and as often as you want throughoutt the year, some can only be done once per year at or near anniversary date).
* The compound period for a Canadian mortgage is semi-annual, but this calculator can also be used for US mortgage calculations by changing the compound period to monthly – the main difference between a US and Canadian mortgage.
They are planning to following the final option in the chart. If they can save make an extra $50 payment every two weeks and save to make a $3K payment every year, they will reduce their mortgage term to just over 16 years.
My son lives farther away and seems to be pretty savvy. I’m pretty sure he’s paying off his credit cards each month. I think his student debt is fully paid. I believe he is also saving for a down payment for a house. Other than that, I don’t know much else.
I offered him help to prepare any budget spreadsheets answer any questions he may have in order to ensure his financial house is in order. He hasn’t taken me up on it yet, probably because when we see him we don’t really have time to spend on this. But he knows I’m ready any time, even if we do it on a web session. I can always send him the spreadsheets to fill out, but something tells me that it’s easier more valuable if Mum is there to ask the savvy questions and keep it interactive!
One of the drawbacks though, is that if Mum does all the work, they may be less likely to keep it up or track their spending going forward etc.