This Sunday is my one-year anniversary.  I am not the easiest person to be around, so I’m glad my wife hasn’t changed her mind (yet).  Looking back at the past year, it didn’t really seem like a lot happened (other then the wedding and honeymoon in Cuba) that was different than any other year, but there were a couple of milestones that I thought I would highlight:

We as a couple became debt-free, other than our mortgage:

I haven’t carried debt of any kind for the past 5 years, since I paid off the last of my $25,000 in student loans.  My new (or as I like to say “current”) wife however had not read the same personal finance books that I had (or any at all) and had not received any financial advice from her family growing up.  Until we got engaged, we really didn’t talk about money all that much, I assumed that she had some debt (as most people do), but not a whole lot.  I was a little freaked out when I found out (after some coaxing) that the total debt was close to $20,000 - about half on a credit card at 19% and the other half on a department store credit card at 26%!  At the time, I didn’t really know what I was getting into, but after some discussion about spending and debt repayment, she was able to pay off her entire debt (on top of saving for our wedding) in about a year and a half.  As of this week, she not only has no debt, but she has over $3,000 in savings - something I don’t think she’d ever really even thought about, let alone knew how to do.  Money-wise, she is a lot less stressed - there’s just a lot less to worry about, although her new spending involves a lot less new clothes (a downside to watching what you spend).

We bought our first house together:

I had, up to the day I bought our house, never really thought I would be a homeowner.  Owning and having to look after a house had never really appealed to me.  Being a home-owner was very important to my wife (although apparently it had to be a specific sized house), and I warmed up to the idea, eventually.   Together, we have learned to do many new things that I don’t think I had ever really put any thought into before, like laying floor, wiring lights, painting, fitting trim around the house - we have also taken on the most debt that we probably ever will.  While the home improvement portion of owning a house is interesting and exciting, the paying off of the mortgage is daunting and boring.

So, those are the two main money things that I got up to in my first year of marriage.  Although the debt that I “discovered” was a bit of a shock, my spouse was able to (independently) pay it all off, and at the same time learn some personal finance fundamentals.

Did anyone else have any surprises like this when they got married?  How did you resolve it?

Over the years, I have created a system of banking and spending that I thought I would share.  It’s probably more complicated then it needs to be, but It works for me.  I have 4 different bank accounts at 3 different financial institutions, as well as 3 credit cards and a line of credit.  On top of these, my wife has 2 savings a chequing account and a credit card.  Here’s what I use them all for:

My Bank Accounts:

“Big Bank” - Chequing Account (CIBC):  This is my main account that I have my paycheques deposited to and any direct-bill payments made from.  All of my accounts are linked through here. This account is also the only account that I pay fees on as well (approximately $5-$10 per month), which is the reason I have contemplated getting rid of it in the past.  I have kept the account with the fees because from time to time it is convenient to have a “real” bank to go to - whether it’s for a certified cheque or a place to bring a grocery bag full of change to to deposit, I find myself actually talking to a teller about 3-5 times per year.  In addition, the fees I pay are the only bank fees paid by our household as my spouse recently got rid of her “Big Bank” bank account in favour of an online account.

Online Saving Account (PC Financial): I use this for my emergency fund - it basically just sits accruing interest, hopefully never to be tapped.

Online Chequing Account (PC Financial): I rarely use a debit card, but when I have to(there are no other options) I use this account that has about $50 in it.

Online Savings Account (ING):  This is the account I use for more long-term goals.  In the past, I have used it for saving up for a car and for my wedding and honeymoon.  Right now I’m putting aside a little bit of money each paycheque to fund my golfing habit for the summer.

I like to keep my savings split up (as opposed to Tim’s Super Fund) because it’s easier for me to see what I have to spend on things like golfing and other more personal expenses, as opposed to “Household” savings like the emergency fund.

My Credit Cards:

PC Financial Credit Card:  This is the card I use for most purchases, from $2 and up (I don’t usually carry around any cash as I find I spend it much easier then using a credit card).  I am probably one of PC Financial’s worst customers as I have probably cashed in around $500 in points and have paid $0 in interest.

CIBC Visa:  This card has a very low ($200) limit on it that I use when I buy things online.  I might be paranoid, but I don’t really trust some of the payment processors I see from a portion of online retailers.

Home Depot Credit Card:  I like the do-not-pay for 6 months zero percent interest on this card.  I don’t buy stuff unless I can pay for the purchase outright, but for cashflow purposes I’d rather take the 6 months to pay off what I’ve bought then front the money outright.  I realize that making purchases like this is contrary to most personal finance wisdom.  Most personal finance writers do not view credit cards favourably, but for larger (>$1,000) purchases I’d rather have the money in my account for 6 months earning interest then with Home Depot.

My Line of Credit:  I have a $15,000 line of credit that I don’t use, but was offered when I signed up with PC Financial, so I took it.  If necessary, I would use this to supplement my emergency fund, but can’t really see many situations that this would happen.

Other then the Home Depot card, I pay off my other spending credit cards biweekly when I am paid.

So, that is my system - writing it out makes it seem a lot more confusing then it actually is, but it’s what I use to keep my finances organized.  I’m wondering how many different accounts and credit cards other people have and if you have a similar system of organization?

I suspect most of you would have already hear that the government FINALLY got off  its butt and introduced some new rules to help rein in the housing market.  In summary the new rules are:

1. Applications for a variable rate mortgage will also have their affordability tested at the 5 year fixed rate to ensure people can handle a rate increase.
2. When refinancing you can take out up to 90% of your home’s value down from 95%.
3. When buying investment property (non-owner occupied) you now need a 20% down payment to get mortgage insurance instead of the previous 5%.

All rules take effect on April 19, 2010.  So are any of these actually going to help?  Well the fact that the deadline is down the road will push through a hell of a short term surge in buying so if you don’t absolutely need to buy a property in the next few months I would sit on the sideline and watch the bubble do it’s last surge up in prices.

Then with each rule, here are my thoughts. Rule #1 is basically forcing a practice that was done at many banks anyways.  It’s not a huge change since the vast majority of mortgages applications are for fixed rate (I can’t find the exact reference but around 70% if my memory is correct).  So it won’t do much of anything in the overall market.

Rule #2 is basically trying to prevent some US style lending where people treating their houses as ATM’s.  Given it’s only a 5% shift it won’t change things for the majority of the market.  So again I think this rule won’t have much of an affect on the market overall.

Rule #3 is the bubble killer.  This is the one designed to halt flipping of houses and speculative buying which is feeding a lot of price increases in some markets.  For serious investors with cash to burn this will only slow them down, but it should put a wet blanket over those weekend flippers that are just trying to make a quick buck.  So in some regards I like this rule since it is targeted at a problem section of the market rather than increasing the down payments for everyone.  On the other hand, it will at best shave off the top of the housing bubble, it won’t deal with some of the core problems that we are facing.

In my mind the 35 year and the previous 40 year amortization periods are the real problem.  By stringing the debt over a long period with a cheaper rate it looks affordable to a person’s cash flow, but it masks the problem that people are buying more house than they should.  So after the last surge and markets fall and interest rates rise we will see the larger affect when people go to renew their fixed rates in 4 to 5 years.  Then you will see people with more debt than home equity and facing a higher rate will look at getting out of their houses and you will likely see a further push down on home prices.

So in conclusion my thoughts are the rules will help time the deflation of the bubble, but won’t stop the longer term fall out from a deflating bubble.  It’s gong to be an interesting few years for house prices.  So what do you think of the new rules? Useful or crap?

So after spending almost a week in the US (by the way, 6am flight yesterday so hence no post) I got immersed in the local news and I was trying to wrap my head around the US federal budget that was around $3.7 trillion dollars.  WOW, that’s a lot of zeros!  But besides that, it is interesting that they are spending about $1.6 trillion more than they earn (that’s about twice the entire US military budget according to the paper I was reading).

In order to make sense of how crazy this situation is lets chop off a few zeros and put this discussion in terms of personal finance for someone named Mr. US.  You see Mr. US has a hard life.  For some reason he was appointed peace-keeper in his neighbourhood.  Yet for some reason now a few years later he is also keeping the peace over in the next neighbourhood which has a lake between them, so he spends far too much of his time worrying about things that have nothing to do with his house.  Then to top it off his family is completely dysfunction, they can never decided where to get take out food so they often end up ordering from three different restaurants trying to keep everyone happy.  This is also why they live in a 3000 sq foot home and have three cars.  This costs a lot of money and he is the sole income earner so the family has a massive spending problem because they don’t agree on anything and therfore have a huge debt.

In terms of pure numbers, Mr. US makes a mere $21,000 a year.  Yet this hasn’t stopped the family from spending $37,000 last year ($16,000 more than they made) thanks to their low introductory credit card from the Bank of China.  This is despite the fact the family is already still in debt to the Bank of China for a mortgage of $123,000.  Yet it gets worse for Mr. US, his aging parents have recently moved in so he expects his health care costs and their living expense in the next few years to eat up even more spending.  So his small income which already wasn’t covering the bills is looking rather pathetic right now.  Also no one in the house seems to be willing to discuss the obvious that they need to drastically cut their spending or they have to raise their income by having Mr. US get a better job or having Mrs. US get a job until the debt situation is back under control.

It’s a sad situation for a household, it’s even worse for a country.  I’m just trying to imagine the effect of having their credit rating shot down a level would have on all of this, which by the way is being discussed already.  Perhaps it’s time for Mr. US to cut up his credit cards.

I’ve previously discussed the concept of a potential housing bubble in Canada, but apparently that speculation is also going on in a few other places such as well such as China and some fears about the US re-inflating their housing bubble again.

Regardless of if these are real bubble or not since 2008 we have collected learned that a housing bubble can send debt shock waves around the world.  Yet what does it all mean for the average person?  Well here’s my list of some common hazards to a housing bubble.

1. Buying a House at the Peak.  This is likely the worst case event to have happen.  You get sucked into a buying a house near the peak of the market and then if the market falls you end up owning a house which has a bigger mortgage than what it is worth.  At this point that extra debt you took on at the peak can’t be gotten rid of by selling you have to eat the extra interest and principle costs.  The good news is if you don’t have to move soon you can spread out the pain over a number of years.  The bad news is you still paid too much for your house.
2. Spread Things Around.  Yes just about every world market got nailed when the US housing bubble burst, but some specific markets in the US did a lot worse for housing prices.  So the rule of diversification still applies, you don’t want all you money in a single country or even city.  Spread things around a bit especially in your real estate investments as you likely have too much money as is in your local real estate market compared to the rest of your assets.
3. It’s Better to be a Lender than a Borrower.  Owing debt sucks  since you are at the mercy of others for interest rates and getting credit.  Especially so when the credit markets start to cease up.  So keep your own borrowing to a modest level and keep a decent credit history they can come in handy when things get tough.  Also some fixed income investments is a good idea for just about everyone since bonds actually did well overall in 2008/2009 and so provided a nice hedge.  Just don’t forget point #2 above still applies to bonds as well.
4. Panic.  The top risk to you in a housing bubble collapse is very simply just one thing: you.  So regardless of how bad things are looking remember to NOT PANIC.  The trick to avoiding panic is having a plan and sticking to it or even selectively ignoring the news for a few weeks.

So that’s the obvious hazards I see in housing bubbles.  As you might have noticed there isn’t a lot of difference to them to most other risks to your financial health.  What else would you add to that list?