What Is Debt?

Debt 101

First Published Date : October 9, 2010 ADawnJournal.com

Something that seems to dominate our lives is debt. Debt routinely influences the lives of individuals, allowing them to buy things, or preventing them from buying things they want or need. As the years have gone by, the debt load of people in the Western World has increased greatly. While most people had little debt in the 1950s and 60s, but the 1990s and 2000s, people owed more money than they made, which is a very bad situation to be in. So, what is debt and how does it influence our lives so much?

Debt is something that is owed to someone else. It can mean money that is owed, or a moral obligation that is owed. Either way, it is something that must be repaid. Like a favour, you are agreeing to pay or do something for someone else at a future date because you are in his or her debt. A debt is created when a creditor agrees to give a lump sum of assets to a debtor. The debtor agrees to repay the debt with interest in most cases.

The word debt itself comes from the French word dette, which itself comes from the Latin word debere, which means to owe. In the 17th century, the letter b was put into the word debt in Samuel Johnson’s dictionary.

When a debt is made, the debtor and creditor must agree on the manner in which the debt is going to be repaid, this is a deferred payment. The payment is typically a certain amount of money that will help pay off the debt, or it could be the entire debt at once. Payment of increments of a debt over time is one of the most common forms of repayment, but repayment in full at the end of the loan agreement is also very common these days as well.

There are several types of debt that you should be aware of when dealing with debt:

1.   Secured Debt – This is debt that is made against some sort of collateral. For example, you agree to put up your house as collateral when you get a loan for your business. If you do not repay your business loan, you lose your house. Secured debt typically has lower interest rates because the risk is less.

2.   Unsecured Debt – This debt is not against any sort of collateral and therefore has a greater risk for the creditor. As a result, interest rates are higher for this and one’s credit score must be good to obtain this credit.

3.   Private Debt: This is a bank-loan obligation.

4.   Public Debt: This is a general definition that covers freely tradable debt on a public exchange with few restrictions.

5.   Basic Debt: This is the simplest form of debt and is just an agreement to lend someone a sum of money over a certain period of time, which must be repaid at a certain date.

6.   Syndicated Loan: This is a loan granted to companies who want to borrow more money than a single lender is prepared to risk. Therefore, the loan comes from several lenders at once and typically runs into the millions of dollars.

7.   Bond Debt: A bond is a debt security that is issued by certain institutions such as companies and governments. This bond entitles the person who holds it to repay the principle sum, plus interest.

There are other forms of debt that many people and companies use to help them manage day-to-day.

1.   Cash credit: This is the primary method in which a bank will get money for the security of debt. It is like a current account except the money that can be withdrawn is done so without restriction to the amount that is deposited.

2.   Working capital: Firms need money to pay for day-to-day activities like paying wages, buying supplies and more. This is the working capital of the company and the main source of working capital is the current assets the company can use to generate money.

3.   Bank overdraft: When you withdraw more money than you have in your bank account, you will often go into your overdraft, which is money lent to you by the bank. You will have a negative balance on your account, which must be repaid at some point.

Debt has a lot to do with credit worthiness. The better your credit, the more of a debt you can take on. Typically, if you have a FICO score above 600, you will be able to accumulate more and more debt, and anything between 350 and 599 will mean you will have difficulty getting debt until you manage your credit better. Companies also have the same type of system for when they borrow money. The best credit rating for a company is AAA, while the worst is C.

When debt becomes too much, one of the most common things for people to do is file for bankruptcy, which is one of the only ways that a debt can be removed without repayment. A debtor cancelling the debt is very rare, but becoming more common especially during the economic crisis. In fact, many economists feel that the only way for developing nations to reach equity with developed nations is for their immense debt load to be erased. As for individuals, many will try debt consolidation or debt counselling, which will allow them to repay their debts without having to declare bankruptcy. The problem with declaring bankruptcy is that it will destroy a credit rating for several years, often as long as seven years in total.

Debt is a big fixture of our lives these days and not something that is going to disappear any time soon. The only way to manage debt properly is to be smart with debt and make sure that it does not become something that causes you to fall behind. Be smart with debt and it will not overload you and make your life less than what you want it to be.

What is Opportunity Cost?

Opportunity Cost

First Published Date: July 4, 2010 ADawnJournal.com

There are a lot of complicated concepts in economics, and while some are easier than others, all of them are important to understand. Economics is a diverse field with many things at play, and if you want to invest, or just save money, you should at least have a basic understanding. This brings us to opportunity cost, something that you may not have heard of, but which you deal with on a regular basis.

Opportunity cost is the cost that is associated with the next-best choice available to you based on two, or more mutually exclusive choices. It is a very important factor in economics and it helps blend the relationship between scarcity and choice together. Thanks to opportunity cost, resources that are scarce and difficult to obtain, are therefore used more efficiently. This also means that opportunity cost goes well beyond economies and financial costs, and into other areas including pleasure, lost time, utility and more.

First created by John Stuart Mill in the 19th century, opportunity cost has become a cornerstone of economics around the world, helping to shape the world we currently live in. Now, opportunity cost may seem rather foreign, and slightly difficult to comprehend, but to help you here are some examples that illustrate opportunity cost.

·   Someone takes $50,000 and puts it into a stock, while the person makes money if the stock goes up; they have lost the money that would have come from leaving the $50,000 within the bank, where they would have collected interest on it. Therefore, the opportunity cost to that person, who chose to invest in stocks than leave it in the bank, is the interest they would have received on their savings.

·   An individual walks into a store and must decide between spending $20 on a video game or on a new pair of jeans. If the person buys the jeans, the opportunity cost is the video game, while conversely if they buy the video game the opportunity cost is the jeans.

Opportunity cost is not just about material or monetary items; it is about what has more value to a person. For example, if a person can afford to go see one movie, and must choose between action and comedy, they must assess which will give them more enjoyment. If they choose the action movie, then the opportunity cost is the comedy, while if they choose the comedy, the opportunity cost is the action movie.

As you can see, the opportunity cost is something you use on a regular basis throughout your life. When you are choosing between what TV shows to watch, what book to buy, which turn to make on the street and more, you are using opportunity cost. Understanding opportunity cost, especially in finances, will then allow you to get the most out of your decisions and help you earn more money, or save it based on the decision you make. Opportunity cost is something you may not have heard of, but it is something you use every day of your life.

Canadian Popular ETFs

 Some Popular ETFs in Canada

First Published Date : July 10, 2010 ADawnJournal.com

Investing in exchange-traded funds is considered to be one of the better ways to invest in the stock market. Where usually you are trying to beat the stock market, with exchange-traded funds you are only mirroring the index itself. This means that there is a better chance for long-term rewards. Of course, conversely you will end up having lower reward because there is lower risk. However, with lower risk comes the long-term ability to slowly build your investment without worry that you will lose it all. In Canada, ETFs are a very popular because they are somewhat safer investment vehicle than others and here are the most popular ETFs within Canada.

·   iShares CDN Jantzi Social Index: if you want to be socially-responsible with your investments, then this is the ETF for you. All the stocks on this index are picked through an extensive process that must meet criteria in terms of environmental records, social records and governance. This index has consistently outperformed the TSX 60 Index, which it mirrors.

·   iShares CDN LargeCap 60 Index: The most popular ETF in Canada, it consistently does well, leading the list of the most active TSX stocks. More than any other ETF in Canada, this is the choice for most investors who want to invest securely and safely.

·   Claymore S&P/TSX Cdn Dividend: This ETF tracks the TSX Canadian Dividend Aristocrats Index, which has stocks and income trusts on it that have, for at least five straight years, continually raised their dividends on an annual basis. One of the biggest benefits here is that there is a high yield dividend, twice that of other ETFs, plus the fact that there is very little competition on the ETF when compared with other ETFs like iShares.

·   Horizons AlphaPro Managed TSX 60: One of the more unusual of ETFs, this one is actively traded, which is unusual for ETFs as most use simple index tracking, rather than having a broker populate a list of stocks. What the broker will do is take the index and play around with the stocks on it to find the best option. The one drawback is that the ETF has only been around for a year and a half, so there is very little history to go on.

·   Claymore Canadian Fundamental Index: This ETF uses a basic index approach in that it will look at various factors based on things like revenues and cash flow, which gives a better and higher rating to stocks that are undervalued. Each year in March, the stock is rebalanced to reflect any changes in the world of the stock market. This index routinely does better than others, making it very popular for ETF investors.

If you are investing in ETFs, then you are probably doing it because it provides you with long term rewards and lower risk. If you are in Canada, then these are some of the ETFs you can keep an eye on to meet your investment goals to give you consistent rewards well into the future.

How to Use Your Credit Card Balance Transfer To Your Advantage

Credit Card Balance Transfer

First Published Date : July 31, 2010 ADawnJournal.com

Credit card balance transfer is a tool used by card companies to entice you to start using their cards in hopes that you will continue using their cards even after the balance transfer promotion is over – regardless of whether you pay off those balances you transferred or not. If you know a few simple techniques, you will be able to use credit card balance transfer to your advantage. Let’s go over a few basics on credit card balance transfer you need to know.

In Canada, you will usually get notifications of balance transfer offers in the mail. It is also a good idea to keep an eye on credit card company websites. Also, you can call their customer support line occasionally to check if any balance transfer promotion is going on.

Once you have a balance transfer promotion offer, read the terms and conditions carefully. Here are some tips to help you to get maximum benefit from a balance transfer:

How long the balance transfer will last – Pay attention to the start and end date of the balance transfer offer. Do not start before this date, even a single day ahead can make you pay very high interest. Likewise, do not stretch beyond the last date. Use Google Calendar, a reminder on your cell phone, or any other reminder to remind you at least 3 business days ahead of the actual end date so you will have enough time to pay before the deadline.

Avoid balance transfer fees – In Canada, usually these types of charges are not seen. However, you still need to make sure that it does not exist.

Write Cheques – If you get the offer in the mail, it usually includes customized cheques only for balance transfer purposes. You can use these cheques to pay off other high-balance cards, or you can deposit cash to your own account (using these cheques) and then pay off other credit cards from your bank account. Using these specialized cheques as cash should be written in the terms and conditions. Make sure that you will not be charged high interest for paying other credit cards by taking cash. Call customer service if you need to be sure.

Transfer by calling the customer service line – You can also transfer by calling the customer service line of the card that is offering the balance transfer. Sometimes, you will only be able to transfer to other credit cards; sometimes you will have the option to take cash in your bank account (linked to your credit card) and then you will be able to pay to other credit cards from your own bank account. Ask customer service which options are available and pick the one that is most convenient for you.

Do not pass your deadline – As I mentioned before, under no circumstances should you delay paying off the balances you used for those promotional months. Even a single day delay can make you pay additional fees and high-interest (instead of low interest) penalty and the whole purpose of transferring your balance will be forfeited. So avoid this at any cost.

More than one offer – Sometimes, you will get a balance transfer offer from more than one company. Use your judgment to pick the best offer. Usually, the lowest rate with the longer time-period offers the best value. However, a little higher rate with a longer term than a lower rate with a shorter term may be a better one to pick.

A lot of us decide not to utilize credit card balance transfer because of the hassle and steps involved with it. However, these few steps and a little hassle can save you some money. And it’s never wrong to save a few bucks here and there – it all adds up.

Personal Finance Guide for Kids Age-by-Age

Teaching Children about Money: Goals by Age

First Published Date : August 22, 2010 ADawnJournal.com

Did you know anything about personal finance when you were a kid? I did not, and I hadn’t the slightest idea of how money and finances worked at that time. I wish things were different then. I wish I was taught to prepare myself to face the real world financially. It’s not just me; most of us were not given any money lessons at an early age and at schools and universities. It is time to take lessons from our past. As parents, our goals should be to financially prepare our kids to face the money challenges that exist in the present world. Today, I will present a simple age-by-age personal finance guide for kids. To make things simple, I have broken down the learning time frame into 4 different parts: age 1 to 5, 5 to 10, 10 to 15, and 15 and beyond.

Personal Finance Guide For Kids: Age Up To 5

Kids start to show interest in money and coins at an early age. During this time frame, start teaching kids the basic concepts of money. Here are some ideas:

Introduce them to various coins and bills.

Teach them how different coins and bills add up to a greater bills and coins. For example, 5 pennies make a nickel, 5 Loonies (1 dollar coin) make a 5 dollar bill and so on.

Explain how money and society work. Money is something that we exchange to buy various products and services to take care of ourselves.

Teach where money comes from. We go to work to earn money and this makes us sacrifice our time at home with family.

Buy them a piggy bank and encourage them to save money by putting money in it whenever they have some in their hands.

Personal Finance Guide for Kids: Age 5 to 10

Explain that money is not endless. We need to make choices between products or toys; we can’t have it all, as money is not endless. If your kids ask for many things at a time, an exercise you can do is to give them an amount, such as $5 or $10, and tell them to pick the one they think would be the best.

Tell them we need money to buy food and take care of ourselves. We can’t spend all money as soon as we get it because if we do that, we will be in trouble in the future and won’t have anything to take care of ourselves.

Involve kids in family planning and finances. Ask your kids to participate actively in family meetings regarding future planning and money issues. For example, if you are going on a vacation, ask your kids to research the best deals within your budget or ask everyone, including the kids, for their suggestions on fulfilling goals of making major purchases and so on.

Do not give kids allowance without proper guidance. Help them to budget their allowances, especially a certain percentage (15 to 20%) going to their savings accounts.

Teach them how to pay for a purchase and how to count the change they are getting back from the cashier.

Teach kids the power of giving. Tell them that we are fortunate to live in one of the wealthiest countries on earth and not everyone is as fortunate as we are. Explain to them that we can live a more meaningful and joyous life by sharing and giving what we have to those who are less fortunate.

Explain how a bank works, what a credit card is and why it charges interest. 

Explain to them what a budget is and why it is important to stay within a budget. However, do not over-emphasize the budget at this time.

Personal Finance Guide for Kids: Age 10 to 15

It is time to put some concepts you taught your kids in the previous age segment into practice at this time.

Set up a real savings account at the bank. Teach your kids how to handle bank accounts. Teach them about credit cards and how they work. You can also set up a credit card for them with a lower limit. Here is an article to deal with credit cards for kids: Should We Give Credit Cards to Kids?

Help your kids with setting goals. Explain to them how to set up goals and show them how to reach goals by making plans. For example, if they want to buy a bicycle or a gadget, instead of financing the full cost ask them to finance half from their savings by setting up goals to save that much.

Kids should pay for their expenses such as movie tickets, cell phone bills, snacks, etc. themselves. The reason? Using their allowances to pay for stuff they need will make them realize that money is limited and if they waste money on something, they won’t have money to buy other things.

Ask them to exercise the power of giving. Even from their small allowance, they can donate to charities and to those who are less fortunate.

Kids should budget for their expenses at this point and should spend less than their earnings or allowances.

Kids should not be paid for doing regular household chores. However, you can pay them for special projects which are outside regular chores such as such mowing the lawn, cleaning the backyard, and so on.

Personal Finance Guide for Kids: Age 15 and Beyond

This is the most critical time of kids’ lives as they are on the verge of stepping a foot into the real world. Personal finance education should follow a slightly different path at this stage.

Start talking about more targeted personal finance teachings starting this point. Some of the examples are: Investing 101, debt management, credit cards, how financial markets and products work (Invest Now by A. Dawn is a recommended book to learn the basics of financial markets and products), and so on.

Some of the resources you can use for your kids can be found right here, written by your favourite personal finance author A. Dawn. The Personal Finance For Kids Section is just one to mention among a few of them here. There are tons more articles suitable for kids available for free on A Dawn Journal. Take your time to read them to enhance your knowledge on personal finance at your leisure by bookmarking this page.

Just because your kids have reached this age does not mean that you should stop talking about finances. Kids at this age need more financial advice and guidance than ever before. Have open discussions about money and finances whenever opportunity exists.

I have taken my time to write this article suitable “in general” for all kids. These guidelines or tips are not set in stone. It is recommended that, based your kids’ ability or interest, you may need to switch around these tips. For example, if you find your 7-year-old seems to be very interested in learning about finances, try using some tips from the 10 to 15 age group and observe how she reacts. It is the parents’ responsibility to secure their kids’ financial future by guiding them through a solid financial roadmap from their early days.