Monthly Archives: March 2015

What will your monthly payments be?

I have looked around a bit to see what loan calculators are out there that help calculate what your cost will be to borrow money.  This particular one, from the Royal Bank of Canada seems to be quite flexible.  Of course the bank wants to make it easy for you to calculate the payments however I have my doubts that you will be able to find a good interest rate at the bank – that has been my experience.  Most of the car manufacturers have set up a financing arm of their business to provide loans for the purchase of their cars at a much lower rate than the banks.  As an example, banks right now tend to lend in the 8 to 9% range for cars while there are many manufacturers that are selling cars with 0% loans.  On a $40,000 car (and amazingly that is not that expensive $35,398 before tax) the difference is $165 per month over a 6 year term – big difference.  The Royal Bank calculator is here at RBC.

The Annual Cost of a Car

Just a quick post to show you a great tool.  I stumbled on to this site when I was in the process of thinking about how much it actually costs to own and drive a car.  I think you will see that the costs are much higher than they appear on the surface once you calculate everything.

The main cost as you will see is the depreciation cost of the vehicle you buy thus reducing that cost will be the most important in keeping your overall costs down.  The website if the Canadian Automobile Association and can be found in this link to the CAA.

Just an example of the costs – for a Honda Civic the monthly cost is $716 while the cost for an Audit A6 is $1,545!  That is a lot of money for either one!

 

 

 

What does a house upgrade really cost you?

I decided to write a post about different ways you can find the money to plan for a secure financial future. As we make our way through life we make many financial decisions that impact our future wealth, often without even knowing it or thinking about it. I tend to think of those as lost opportunities and would like to explain. Some of the things that we decide to do can have a huge impact on the financial resources that you will have to enjoy a great life in the future. Although things can seem important to us right now, it can be important to know the costs of these decisions so that you can look at the bigger picture to assess whether you are willing to give up things in the future as a result.

One example of a decision like this is the one to upgrade a house. In the Western world we often feel pressure to upgrade our house – we tell ourselves we deserve it, we may even get into saying (and I hate this saying) yolo – you only live once, meaning I suppose that you should have a bigger house. But what does that cost you?   Well it can be very expensive and often we don’t go the effort of calculating that cost to determine if we are really willing to give up so much wealth to get it.

The example I will show you is likely somewhat common. Let’s assume your current house has a market value of $200,000 and you owe a mortgage balance of $150,000 giving you equity of $50,000. Your current monthly mortgage payment is $1,200 and you have 12 years left to pay. The problem that you have with your current house is that there is no bathroom in the master bedroom and you would like to have an extra bedroom so that you have a dedicated guestroom and an office space.

You have found the new house and it is great – two extra bedrooms, an ensuite and a family room! The price? $350,000 but with your equity you only need a $300,000 mortgage and the rates have never been this low. The payment for the mortgage for the new house will be $1,661 for 20 years plus the taxes will be $210 per month higher.

We tend to make these decisions based on whether we can afford the payment for the new house without any major difficulty. In this case the result is $671 per month more for 12 years and then $1,871 more per month for the following 8 years! Sound like a lot of money? Well it is! Let me show you! Yes, with your two incomes you can afford to pay that much for the new house, that looks on the surface to cost $150,000 more than your current home – but does it really only cost that much more, or will it have other affects?

To clearly show the financial impact of these extra payments for the bigger house, I calculated what the difference in the stream of payments (your extra payments over the next 20 years) would be if invested at 8% instead of buying the house. The end result is that the bigger house will actually cost you $555,000 at the 20 year point! This is a $555,000 investment nest egg that you could have to help you live a better lifestyle in retirement. At 8% return on your investment nest egg you can have an extra $3,700 a month in retirement income instead of upgrading the house now. The other thing that I didn’t include was the extra $210 per month in taxes that will be permanent – wow!

As you can see – the decision to upgrade your house may be more expensive than you think. You may still want to do the upgrade but you should calculate the financial impact beforehand so that you know your options. For me, the ability to live half the year in the Caribbean in retirement would be more important than the bigger house – think about it!!