Live within your means; Borrow within your means

You can spend money you don’t have, for a while. But it will catch up with you if you live or borrow beyond your “means”. What does this “mean”? (No pun intended!)

Living within your means implies that you spend a reasonable amount relative to your earnings. The result is that you do not build up debt inadvertently week to week, or month to month.

Borrowing within your means implies that you have thoughtfully considered using debt to acquire something that you cannot afford to pay for fully in cash, usually a large purchase such as post-secondary education, a car, or a house. The amount and terms of the debt must be such that you can pay the interest on the loan regularly, and you can pay down the principal of the debt gradually and steadily over time.

In an earlier article we discussed “good” and “bad” debt. So, let’s make the assumption here that only “good” debt will be incurred. You can still make choices that make “good” debt even better.

Borrow within your means and do not over extend yourself. Make your payments on time and in full. Find out if the lending institution offers the ability to pay out your loan in full at any time or increase your payments to pay down your loan faster. That way if you have some extra cash (think gift, pay raise or bonus), you can drop the extra on the loan to reduce your long-term interest, and pay off the loan quicker.

Shop around and do your homework. There may be better options out there if you look around at interest rates, fees and the costs of completing the lending product. Are you able to negotiate rates, waive fees or bundle your business to reduce cost? Not all lenders are equal.  

Understand how much it costs to borrow funds:
APR = Annual percentage rate:
• Actual rate of interest charged on a loan each year; may be fixed or variable
• Lender must tell you how much total interest you will pay
• What fees or extra charges may apply, including a close out fee
• Any other costs associated with borrowing

How the lender calculates interest:
• Mortgage and Loans- The determined interest rate is multiplied by the principal balance at the start of the term. Each payment is made up of interest and principal repayment
Credit cards- you have until the due date to pay the balance in full and you are not charged interest. However, if you do not pay off your full balance, you are charged interest from the day you made each purchase until the amount is paid in full. Remember cash advances and balance transfers interest is charged at withdrawal date up front

We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website  

Karin Rimnyak, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.

David Dryburgh, Certified Financial Planner­®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

Ian Barrie, Certified Financial Planner®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.