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How to Prosper Financially

Debt

Pros and Cons of Debit Cards

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Understanding more about debit cards can help you make better decisions to do with your finances. Debit cards have many upsides to them which make them useful in a wide variety of situations. Not everybody knows the right way to use them though. They are great for anybody and are accepted near everywhere making them convenient. However, according to worldwide data debit and credit cards are used at a near equivalent rate. This shows that credit cards must have some advantages over debit cards. In this article we will breakdown all the benefits and drawbacks of debit cards to help you be informed and decide when to use them.

The pros of a debit card

Debit cards are very convenient. Being declined very rarely, they are great worldwide and can be used to withdraw money from widely available ATMs. Withdrawing cash with debit cards means that the money is immediately removed from your account. Because of this fact, you do not end up garnering a balance that you have to pay off. This balance comes with owning a credit card, and you could end up having to pay interest upon it, a problem that debit cards come without. Debit cards are interest-free.

Another advantage of debit cards over their credit counterparts is that in most cases they do not carry any annual fees. This factor is key for it makes them easier to afford. You won’t have to pay or use your debit card to keep it activated. You can make as few or as many purchases without worrying the card’s functionality. Accounts associated with debit cards like chequing accounts do sometimes charge monthly and/or annual fees.

With credit cards, it is quite easy to overspend in the short-term. This is not an issue with debit cards because the money you spend gets withdrawn instantaneously from your account. Your limit is capped at whatever you have stored in your account, though keeping track of your accounts status should be enough to make you weary of purchasing large items you might want. With credit cards you can keep buying and overspending without keeping tabs, which can have grave consequences when the time to pay the stack of bills comes around. Debit cards are also comparatively painless to acquire. Credit card application typically involves a hard credit check to understand more about your history and whether you are eligible. They also require a certain credit score but with debit cards all you need is a chequing or savings account to attach to the card and you’re all set to bank away.

The cons of a debit card

Though they have their upsides, debit cards come with a set of attributes that aren’t all that great. One of their biggest downsides is that in some circumstances they simply aren’t as safe as credit cards. Fraud protection with debit cards can be somewhat insignificant. The Federal Trade Commission dictates that if you notify your bank within two days of it being stolen, you are liable for up to $50 in charges that are fraudulent. If you miss that window of two days you can be held responsible for up to $500. In the worst case scenario where you only let your bank know after 60 days, you could end up paying all of the fraudulent charges. Banks simply cannot ensure total safety, especially with online retailers. Knowing this, it is suggested to use other payment methods when making purchases online. This can help you stay safer from cyber fraud which is rampant in today’s internet, even if you have antivirus software and a secure network.

Wherever and however you choose to spend your money, know that with debit cards your limit is equal to the funds in your chequing account. That means debit cards are better suited to more manageable purchases as opposed to expensive impulse items whose purchasing depends on whether you have the available funds in your chequing account. It is still an option to exceed your chequing account balance. If you do go over you will be charged overdraft fees. You can stop authorizing your bank to charge you these fees but you may end up having your debit card decline when going over your chequing funds.

Despite their similarities, one of the biggest differences between debit and credit cards is also one of the biggest disadvantages of debit cards. It is credit score and how debit cards have no effect on it. With a credit card you can build your credit score by making all your statement payments in full and on time. Debit cards cannot help you achieve this. Of course, credit cards also put you in danger because if you leave your card unpaid or pay late, you can accrue overwhelming debt and you will end up with bad credit. If you owe a lot on your credit cards with high interest, you can roll it over into your mortgage, by borrowing on your home equity line of credit. This will help you repay your credit card loans faster and in a less costly manner. Credit cards also often have strong rewards programs and perks that allow you to automatically accumulate points from use, or give you cashback. Debit cards don’t have programs like these. There are occasions where banks have their own specific rewards for debit cards but it is rarer.

Knowing all this information, you still might not be completely sure when and how to properly use a debit card. Essentially, debit cards are best to use for anything small and routine. This could be a fair list, including things like groceries or monthly entertainment service fees. This is because all the money is directly withdrawn from your chequing account, so you can monitor it easily, making sure you don’t run out. Overtime, this practice will lead to great established spending habits, making you more confident and comfortable with your money. Avoid the purchases carrying more hefty amounts as they are better suited to credit cards. The downsides are not too many, but you should be aware of them. Problems with fraud and the inability to improve credit score are two of the biggest issues.

Inflation in Canada

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Inflation rates are record high around the world, and Canada is no exception, with an 18-year high of 4.7 percent in November. Prices rose across sectors, ranging from bakery, dairy, and meat to furniture, household products, energy, and transportation.  A combination of factors is driving inflation, the main being money printing, high oil prices, product shortages, supply chain disruptions, and pent-up consumer demand.

Reasons for Record High Inflation

Whether high inflation rates are driven by global supply chain issues or money printing is a hotly debated issue at the moment. In the view of some academics and finance experts at the Bank of Canada, it is supply chain disruptions that cause inflationary pressures and drive food and energy prices up. According to a second group of academics, monetary printing creates an overabundance of demand while supply would not always catch up. The result is inflation whereby prices rise and purchasing power declines.

If we take the monetarists’ argument, inflation is not a temporary phenomenon and requires a tight fiscal policy and interest rate hikes. Such policies would involve tax increases, spending cuts, unemployment, and recession. Recession is generally a period of economic decline marked by substantially lower levels of industrial and economic activity. Businesses see less demand and are forced to lay off workers to cut costs, generating unemployment and insecurity.

As prices rise, inflation also eats away at our money and savings. Inflationary pressures not only result in an overall decline of purchasing power but affect the performance of companies and interest rates on savings accounts. When inflation is high, central banks would typically raise interest rates to discourage consumers from borrowing and buying and keep the cost of goods and services stable. The Bank of Canada recently signaled that interest rate hikes cannot be ruled out as a way to keep inflation under control. The current situation, however, is high inflation and low interest rates on savings whereby the value of your money declines. Fortunately, there are plenty of things to do to protect your savings, like investing in real estate, precious metals, commodities, crypto, and defensive stocks.

Investing in Real Estate

As the value of real estate rises with inflation, rental income can be a potential hedge, especially when it comes to short-term leases such as multi-family properties. Investors who are able to keep their mortgage terms the same and adjust their rent up benefit from inflation. Investing in real estate also provides recurring income that either exceeds or keeps pace with inflation.

Precious Metals

Precious metals such as platinum, silver, and gold are known to be a hedge against inflation as well as a portfolio diversifier. Each precious metal, whether palladium or gold, has its own unique specifics, benefits, and risks. Gold, for example, is less affected by demand and supply, making it easy to sell and buy. An added advantage is the fact that there are different investment options to choose from, including numismatic coins, bars, and proof and bullion gold coins. The downside is that it doesn’t produce passive income the way real estate does.

Commodities

When inflation is high, commodity prices also rise and offer a good return potential. Unlike financial assets such as bonds and stocks, commodities are one of the few investment classes that actually benefit from inflationary pressures. The rationale is that rising demand for services and products results in price increases and hence, the value of the commodities that go into producing goods and services also increases.

Bonds and stocks, on the other hand, tend to perform better when the inflation rate is either slowing or stable. When inflation picks up, it reduces the interest rate that bonds pay while high-dividend and income-oriented stock prices fall. This is why returns from commodity indexes like the S&P Goldman Sachs Commodity Index, Credit Suisse Commodities Benchmark, and Bloomberg Commodity Index are independent of bond and stock returns.

Defensive Stocks

Defensive stocks offer stable earnings and dividends regardless of market conditions and typically outperform other investments in periods of economic decline such as recession or stock market crash. The reason is that they belong to sectors of the economy where there are only minor changes in demand. Such sectors are, for example, healthcare, utilities, and food and beverages. The consumer defensive sector includes businesses engaged in the production of packaging, personal and household products, food and beverages, and tobacco. The sector also includes companies offering services such as training and education. Organizations providing healthcare services fall in this category, including medical supplies and equipment, long-term care facilities, hospitals, home health care, research services, and pharmaceuticals. Examples are also life science development and biotech, vaccine developers, and medical device manufacturers. A third sector is utilities, comprising independent power producers and water, gas, and electric utilities and a fourth – communication services such as media and advertising, 5G network, and telephone and broadband.

Crypto Currencies

Investing in crypto currencies can be a viable alternative to stocks and bonds, with a return of over 6 percent. Proponents point to the fact that bitcoin is not tied to a particular economy, fiscal policy or currency and cannot be devalued by a central bank or government printing money. Not only is bitcoin a digital currency but it has a limited supply and is secure, interchangeable, and durable. Finance experts, however, warn that crypto is a highly volatile asset and one tied to speculative trading. Also, cryptocurrencies have been around for a relatively short period to establish whether they can really act as a hedge against inflation.

Gold, on the other hand, has held its value for centuries. Academics at Duke University also note that bitcoin is vulnerable to crashes and manias over relatively short periods, which makes it a risky asset. Its value is tied to two factors – speculative trading and supply. All in all, bitcoin may have a limited value in developed postindustrial countries with stable fiat currencies. Crypto currencies may have a more practical use in countries prone to political instability and turmoil and hyperinflation.

Summing Up

Inflation is currently higher than normal in Canada, primary drivers being money printing, pent-up demand, and supply chain bottlenecks. Droughts affecting agricultural produce across the country are only making things worse.

Global supply chain disruptions are likely to continue in 2022, mainly due to China’s Covid-19 zero policy, resulting in delayed ships and overwhelmed ports. Inflation rates of 4 – 5 percent could also be with us until 2024. While these changes are temporary, a shift in Canada’s monetary policy may not have the desired effect. Hiking interest rates would result in economic slowdown at a time when governments around the world are withdrawing emergency support and fiscal stimulus.

What Canadians can do to protect their savings is invest in precious metals, real estate, defensive stocks, or commodities, all of which acting as a hedge against inflation. Other assets that offer protection against inflation are leveraged loans, real estate investment trusts, and mortgage-backed securities and corporate bonds.

8 Easy Steps to Become Debt Free in 2022

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Having debt cannot only affect your credit score but can cause a lot of stress, depression, fear, low self-esteem, and even denial. Many Canadians face piling bills, empty checking accounts, and debt in the form of car payments, credit cards, mortgages, and personal and student loans. The good news is that there are easy steps to follow and achieve financial security and freedom.

Step 1 – Make a Budget

Creating a budget is the first step to getting your finances in order and under control. To create a good personal budget, you may want to start with an itemized summary of your expenses and income. Check your financial statements, including utility bills, rent/mortgage payments, investment accounts, and bank statements. Then list all expenses and sources of income. Sources of income to record include your paycheck, investments, alimony, bonuses, rental income, and dividends. Then record your expenses, including utility bills, groceries, insurance coverage, car payments, and mortgage or rent payments. Compare your income and expenses and if you are over your budget, divide expenses into fixed and variable. Variable expenses include gifts, dining out, entertainment, etc. This is the category that allows you to make adjustments and cut down on expenses.

Step 2 – Start Paying off Your Outstanding Bills

Paying off outstanding bills is an important step to becoming debt free. Interest accumulates if you only pay the minimum balance, and it will take you longer to pay off card debt. If you have high-interest cards, it is best to start with the card that carries the highest interest rate. If you have a large balance, this means that you pay less toward the principal and more toward interest charges.  When you are done paying your card balance, you may want to focus on the card that carries the next highest rate. Make sure you pay your utility bills on time as well. If you are significantly behind on electricity, gas, and water bills, your providers are likely to report late payments to the credit bureaus. This will affect your credit score and ability to obtain low-cost loans. Not only this but even when you are done paying all cards and loans, your credit score will still be affected.

Step 3 – Negotiate for a Lower Interest Rate

Negotiating a lower interest rate helps make payments more manageable and affordable. There are different ways to go about this, and one is to focus on the oldest credit card that you have. Credit unions and banks are more willing to work with loyal and established customers and are likely to lower your rate. If you have other credit cards, it pays to simply call and ask. Make sure that you have the required information such as your current interest rate, outstanding balance, due date, grace period, and other card terms.

Step 4 – Do a Credit Card Balance Transfer

This is another way to lower the current interest rate and pay down debt faster. Many financial institutions offer balance transfer credit cards, including CIBC, Scotiabank, MBNA. Banks feature very low or zero introductory rates during the promotional period, allowing customers to save on interest charges. However, it is also important to check other terms such as annual fees, balance transfer fees, late payment penalties, and grace periods. Some providers also have minimum income and credit score requirements. Ask your issuer about perks and incentives such as low annual fees, comprehensive insurance, awards schemes, car rental discounts, and return guarantee.

Step 5 – Set Financial Goals

To set financial goals, it is important to consider what matters to you, whether saving for retirement, paying college tuition, buying a new car, or going on vacation. Then consider whether it is within reach and how long it will take you to achieve your goals. The next step is to create a budget and set money aside on a monthly basis. Make sure your budget is realistic. You may want to open a separate savings account and transfer money from your debit account. Monitor your progress to see how close you are to accomplishing your goals.

Step 6 – Use Cash

Experts claim that using your hard-earned money makes it less likely to splurge and overspend.  This is what behavioral economists call the pain of paying. The main reason lies in the physical component of paying cash. Getting to an ATM to withdraw money also has a physical component and is inconvenient for many. A good way to save is to follow the cash envelope budgeting system. It involves withdrawing money at the beginning of the month and dividing it into different categories, including groceries, gas and transportation, entertainment, etc.

Step 7 – Avoid Expensive Hobbies

Some of the most expensive hobbies to have include scuba diving, yacht racing, flying a plane, model railroading, to name a few. Needless to say, you should avoid expensive hobbies like these and will save tons of money. The majority of people have hobbies such as photography, bicycling, swimming, and reading books which are low-cost and fit into a tight budget. Unlike them, ballroom dancing, ice sculpting, and hot air ballooning can be very expensive and are not everybody’s affair.

Step 8 – Avoid Eating Out

Eating out can be expensive even if you only eat at fast food chains. Spending $10 a day at your favorite fast food chain adds up to $50 a week and $200 a month. To save money, it is best to avoid eating out during the workweek, prepare meals at home, and bring the lunchbox at work. This is also a way to ensure that you have a healthy and balanced menu. It is a good idea to create a meal plan for the week and buy the products that you need. In this way, you will only buy items that you need instead of wasting money on groceries. Another way to save money is to stock on inexpensive convenience items and prepare meals when you are short of time. Such items are bagged greens, canned beans and tomatoes, and pre-made pizza dough. You may also think of products that come together for a healthy and cheap meal. There are great inexpensive meals to cook, for example, cheese olive bread, spaghetti with meat sauce, curried chickpeas with spinach, and tuna casserole. Combining inexpensive products is also a good way to cook on a tight budget. Cheap grocery items include baby carrots, cottage cheese, tofu, whole grain pasta, brown rice, and chicken bread.

There are plenty of good reasons to get rid of debt, the most important being that you will enjoy a higher credit score, free income, and less stress. Many are aware of this but keep their old habits instead of prioritizing debts, paying off outstanding bills, making a realistic budget, using cash, etc. Being financially literate and savvy about money also helps borrowers to become debt free and make wise choices. People with a good financial literacy know how to set realistic goals and manage their finances. They save toward retirement, have an emergency fund and a balanced investment portfolio, and know their responsibilities and rights as taxpayers, borrowers, and consumers.