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How to Budget

“Lay all your desires out before each other —where do you want to end up?  Set goals and be willing to compromise at times.  Be honest even when it hurts —that’s how you learn to trust each other.  Budget.  Regularly save, no matter how little…”
– Kate Bryant from the Marriage Partnership Magazine article, ‘Holy Matri-Money’

 

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

Statistics Canada no longer collects data on divorce rates.  The 2011 survey concluded that 43.1% of all marriages are expected to end in divorce before a couple reaches their 50th anniversary.  As to reasons why people divorce, depending on the survey you look at, you’ll typically find money issues amongst the top three reasons.

Many arguments over money are related to misunderstandings or miscommunications on spending priorities.  Where two people who love and respect each other sit down and look together over their financial situation and come to an agreement on their spending priorities, many issues can be resolved.  And once these priorities are established, it’s fairly easy to establish a workable money management system.

Should spending later get off-course, it’s then easy to identify what threw things off, confirm or update the budget and spending and saving priorities, and come to an agreement on future spending.

Spenders, Savers and Budgets

I remember when I was an 11 year old boy receiving $1.00 for cutting the front lawn.  That dollar bill burned a hole in my pocket until I had it spent.  My dad would tell me to put away half of it so that I’d have some money to spend some other time.  But within a short time of receiving that dollar it would be spent.  Then when I wanted something special, I never had the money.

Eventually, I took my dad’s advice and developed the habit of saving and I began to appreciate having cash in the bank.  I was able to look at my spending as a decision on how I could get the greatest satisfaction from my money through time.  I learned to think about what I really needed (‘the necessities’) and what things I could live without.  And I learned to spend on things that would last (and hopefully go up in value) versus instant gratification.

In many respects, a ‘saver’ is basically someone who has learned to budget for their needs through time and routinely sets aside a portion of their earnings for savings.  The routine eventually becomes a habit.  And the money one took from the paycheque isn’t even felt as missed spending.

When I think of a ‘spender’ I think of the character of “Carrie Bradshaw” on the television show, “Sex and the City”.  She’d get such gratification on buying a pair of Manolo shoes even though she had a closet full.  But when it came to something important, like buying her apartment, she didn’t have any cash in her bank account nor could she qualify for a loan.

I think had Carrie examined the big picture of her life and the importance of owning your own home, she might have been able to set aside money for a down payment instead of putting it toward shoes that she didn’t need.  In other words, I think many spenders can become savers.

The union of two people to become one family should by definition include a union of spending and saving goals.  To begin the process, a budget is a helpful tool (see template below) to see where the family money goes and what’s leftover.  Then over a few glasses of wine, the couple can think of their future and decide together on goals and then how to fund them.  Included within the budget should be some “mad money” for some fun.  If the budget is too tight, it is more likely than not that the budget will get broken.

My wife can tell you that she detests the idea of having a budget, but you know, once you have separated out the budget necessaries and savings from the “mad money”, it becomes relatively easy to manage.  And where a spender knows how much they have to spend for fun and non-necessities and that’s all for the month, the system can work out.  But the spender has to know that a credit card shouldn’t be used if there is no money in the “mad money bank account”.

Should a person consider ‘violating’ the budget, ideally that person has first talked with their spouse to agree on such spending to avoid conflict.  A slip can happen, but if it is more than occasional, you then don’t have a workable budget.  Alternatively, the slipper might not be in agreement with the budget, the goals, or maybe the slipper might need to get away from credit cards and just spend cash for awhile and learn to live at the living standard.

 

BUDGET CASHFLOW
NAME:
DATE:
    AMOUNT / MONTH TOTAL
INCOME SOURCE HUSBAND WIFE / MONTH
Employment Income
Company Dividends
Company Shareholder Loan Draws
Company After-Tax Retained Funds
Allowance to Non-Working Spouse
  TOTAL >>>      
    AMOUNT / MONTH TOTAL
EXPENSE ALLOCATION HUSBAND WIFE / MONTH
LIVING EXPENSES:
    Groceries
    Eating Out
    Clothing
    Beauty (Cosmetics, Haircuts, etc.)
    Medical (treatments)
    Prescriptions
    Dental
    Fitness
    Help (lawn service, gardener, housekeeper)
    Senior’s Care
    Miscellaneous (Dry cleaning, gifts, etc.)
HOUSING EXPENSES:
    Rent / Mortgage Payments (Principal & Interest)
    Property Taxes
    Property Insurance
    Gas, Hydro, Water & Sewage
    Phone, Cable, Internet
    Maintenance & Repairs / Strata
    Major Appliances / Furniture
    Home Renovation
LEISURE EXPENSES:
    Vacations (incl. Travel Insurance)
    Health Club Memberships
    Golf, Boat, Other
    Recreational Property:
        Property Insurace
        Property Tax
        Maintenance & Repairs
        Major Appliances / Furniture
    Other: ___________________________
TRANSPORTATION:
    Auto Insurance
    Gas & Oil
    Maintenance & Repair
    Parking
    Replacement Fund
    Other (taxi, bus, plane, trains, boats)
PAYROLL
    Income Tax withholdings
    CPP
    EI
    MSP
    Extended Healthcare & Dental
    Short Term Disability
    Long Term Disability Insurance
    Dental
    Other: ___________________________
BUSINESS / PROFESSIONAL
    Professional Liability Insurance
    Professional / Union Dues
    Convention
MISCELLANEOUS:
    Income Tax Instalments
    Accountant Fees (eg. Tax Preparation)
    Bank Service Charges
    Support (Alimony, Child Support, Parental Assistance)
    Private Insurance (Life, Disability Critical Illness, Long Term Care)
    Children College Education / Assistance
    Grandchildren College Education / Assistance
    Donations
TOTAL EXPENSES  
SAVINGS:
    Company Savings
    RRSP Contributions
    TFSA Contributions
    Pension Plan Contributions
    Company After-Tax Retained Funds
    Unallocated Savings
  TOTAL >>>      

Spare Change

Consumer debt has become a huge and growing problem in our society today. Access to credit cards, the use of debit cards and the constant media push of buy now and pay later has enslaved the average North American household. I’m a major fan of having fun and enjoying the good things in life and the results of our hard work. But in order to achieve the healthy balance of enjoying life now and looking after the future and our responsibilities we need to try something different.

The first step is to set a goal for something you want. A new, big, flat screen TV; a winter vacation; a makeover for a room in your house; work on the car, etc. Whatever that you want.

The second is to put yourself on a cash diet for all your incidentals like coffee, eating out, gas, and any other small purchases. At the beginning of the week go to the ‘instabroke’ machine aka ATM or even go into the bank and speak to a real live teller, and take out your weekly allotment of cash. After that leave your plastic, debit, and credit cards in your wallet, or better yet, leave them at home. You can’t use them if they aren’t easily accessible.

Third, pay for everything using only bills. At the end of the day put all your change into a jar you have labeled with a picture of your future purchase. If your dream is to go to Hawaii, get a 52 inch plasma TV, get a new mountain bike or anything else that puts your heart all a flutter. Put a picture on the jar and let the spare change add up. Twoonies, Loonies, Quarters, Dimes, and Nickels add up very quickly when we aren’t paying attention.

Once a month add up the money in the jar and see just how much you are putting away. If you wish, you can then deposit this money back into a separate bank savings account (one that doesn’t charge you fees and pays you at least a small amount of interest and doesn’t have a minimal balance required in order to earn interest) so that your money is safe and growing at least a teeny bit.

In a very short period of time you will find this very simple, painless act of saving fun and enjoyable. For added motivation you might want to create a chart (example: a thermometer) that shows your financial progress towards your goal. It is amazing how excited you can get just seeing yourself getting closer to your reward.

Start today and see how quickly you can go from squirreling spare change away to enjoying the fruits of efforts.

“If saving money is wrong, I don’t want to be right.”
William Shatner

How can I recognise a SCAM?

A very good question and here are some tips including information from the Canadian Anti-Fraud Centre. www.antifraudcentre.ca

1. If it sounds too good to be true – guess what?!
You’ve won a big prize in a contest that you don’t recall entering. You are offered a once-in-a-lifetime investment that offers a huge return. You are told that you can buy into a lottery ticket pool that cannot lose. Oh really?
2. You must pay or you can’t play.
“You’re a winner!” BUT, you must agree to send money to the caller in order to pay for delivery, processing, taxes, duties or some other fee in order to receive your prize. Sometimes the caller will even send a courier to pick up your money. No legitimate lotteries use this process!
3. You must give them your private financial information – I think not!
The caller asks for all your confidential banking and/or credit card information. Honest businesses do not require these details. If you are placing an over-the-phone order, be extremely careful when providing credit card information – get the name of the person and an order number and record it to compare with your monthly statement.
4. Will that be cash… or cash?
Often criminal telemarketers ask you to send cash or a money order, rather than a cheque or credit card. The reason is simple – cash is untraceable and can’t be cancelled. Crooks (obviously) have difficulty in establishing themselves as merchants with legitimate credit card companies.
5. The caller is more excited than are you – oh joy, oh rapture!
The crooks want to get you very excited about this “opportunity” so you won’t think clearly. Lottery, “free” vacation, stock tip – the gimmick doesn’t matter. Act in haste, repent at leisure!
6. The manager is calling – don’t we wish.
The person claims to be a government official, tax officer, banking official, lawyer or some other person in authority. The person calls you by your first name and asks you a lot of personal or lifestyle questions (such as “how often do your grown children visit you”). They are trying to get enough information to steal your identity or have another crook try to scam you as a parent/grandparent.
7. The stranger calling wants to become your best friend – so you need more?
Criminals love finding out if you’re lonely and willing to talk. Once they know that, they’ll try to convince you that they are your friend – after all, we don’t normally suspect our friends of being crooks. Hang up and ignore them – HONEST people don’t try to become best friends over the phone or internet or in chat rooms or dating sites.
8. It’s a limited opportunity and you’re going to miss out – good, miss out.
If you are pressured to make a big purchase decision immediately, it’s probably not legitimate. Real businesses or charities will give you a chance to check them out or think about it.

What can you do to protect yourself?
Remember, legitimate telemarketers have nothing to hide, however….
• criminals will say anything to part you from your hard-earned money.
• be cautious. You have the right to check out any caller by requesting written
information, a call back number, references and time to think over the offer. Legitimate business people will be happy to provide you with that information. They want the “bad guys” out of business too. Always be careful about providing confidential personal information, especially banking or credit card details, unless you are certain the company is legitimate. And, if you have doubts about a caller, your best defence is to simply hang up. It’s not rude – it’s smart.

If you’re in doubt, it’s wise to ask the advice of a close friend or relative or contact the Canadian Anti-Fraud Centre, local law enforcement or the Better Business Bureau. Rely on people you can trust. Remember, you can Stop Phone Fraud – Just Hang Up!

What if I suspect that a relative or friend is being targeted by unscrupulous telemarketers?
Watch for any of these warning signs:
• a marked increase in the amount of mail with too-good-to-be-true offers;
• frequent calls offering get-rich-quick schemes or valuable awards or numerous calls for
donations to unfamiliar charities;
• a sudden inability to pay normal bills;
• requests for loans or cash;
• banking records that show cheques or withdrawals made to unfamiliar companies; or
• secretive behaviour regarding phone calls.

If you suspect that someone you know has fallen prey to a deceptive telemarketer, don’t criticize them for being naïve. Encourage that person to share their concerns with you about unsolicited calls or any new business or charitable dealings. Assure them that it is not rude to hang up on suspicious calls. Keep in mind that criminal telemarketers are relentless in hounding people – some victims report receiving 5 or more calls a day, wearing down their resistance. And once a person has succumbed to this ruthless fraud, their name and number will likely go on a “sucker list”, which is sold from one crook to another.

Also, make sure the details are reported to local law enforcement, the Better Business Bureau and the Canadian Anti-Fraud Centre. In addition, add your phone numbers (including your cell and fax) to the Do Not Call List – at www.dncl.gc.ca. It isn’t perfect but it does help.

Internet and E-mail Safety (and security)

In this blog, let’s look more closely at internet and e-mail scams and security.

Internet
Knowledge is power – and never truer than when surfing the net. The most common risks are viruses, key-stroke recordings, miscellaneous malware and Trojan horses.

Viruses do the same thing to your computer as they do to us – they make it sick; they can even kill it. Key-stroke recording software is installed by hackers and allows them to record all of your keystrokes with particular attention to usernames and passwords – they love banking, credit card and email access the most. Malware is also malicious as it can take many forms: from tracking your internet use patterns to copying files to a remote computer to erasing key pieces of software. Trojan horses get uploaded and then sit in wait – silently for a triggering date or event and then allow the hackers to take control of your computer and use it for attacking other computers.

The only 100% protection against these threats is don’t surf the net! Now let’s get into reality – hardware and/or software firewalls together with anti-virus and anti-malware software.

Hardware firewalls are called routers and they act as a first line of defence between the internet and your computer and are relatively inexpensive to acquire and are not very complicated to install. Software firewalls are generally a second layer of protection after the hardware firewall. Most reputable commercial ISPs (Internet Service Providers) provide this as part of their customer offering and may reside either on their servers or on your computer.

Anti-virus and anti-malware software is sold by several companies (Norton, AVG, Kasperski, F-secure and MalwareBytes to name but a few). Most suppliers offer free versions of their protection suites but remember if it is free, there is a reason! They are in business to make money and the free versions are teasers only. They do help of course, but don’t provide complete protection, so beware of freebies! Running “in the background” on your computer, they analyse every attempt at both inbound and outbound communication over the internet for suspicious software code and either block or delete access to outsiders. You can control all of these functions through a “control panel” that is installed with this software.

Be very selective on the websites that you visit. Some categories are higher risk for spreading these problems than others – dating sites, erotic picture and video sites together social media are the greatest sources of problems – avoid them!

E-mail
Rule No. 1 – if you don’t know the sender or you didn’t sign up for any e-mail notifications from stores or websites, DON’T OPEN IT! The “Nigeria” scams and grandchild scams are run constantly on e-mail as are Lottery scams of various types.
Rule No. 2 – see Rule No. 1.
Rule No. 3 – ensure you have a full-version of both anti-virus and anti-malware software installed on your computer that gets automatic signature updates – preferably daily – to stop evolving threats. If you follow these 3 rules, you are going to be safe 98% of the time.

The final 2% is chain-mail – the electronic version of old chain-letters – if you get one, regardless of the identity of the sender, do not forward it – even if it is from a close relative or friend – don’t!

General
A great reference book on scams is from the Competition Bureau of Canada – The Little Black Book of Scams – click here to get there immediately. The Canadian Anti-Fraud Centre has a website that is all about various scams and identity theft. Click here – Canadian Anti-Fraud Centre Home Page.

Fraud and Identity theft – a common glossary

Unfortunately, identity theft and fraud are among the fastest growing crimes in the world. In 2012, more than 120,000 calls were received and more than 40,000 e-mail messages each month were reported to the Canadian Anti-Fraud Centre! In 2011, credit card fraud alone exceeded $436 million! By contrast, in 2007, TOTAL fraud losses were $14 million. There are many more unreported incidents.

Phishing – An e-mail message that appears to have been sent by a financial institution with which you have business dealings asking for verification of various pieces of information. When you follow the hotlink and answer the questions, the thieves get enough information about you and your accounts to steal your money and perhaps your identity. The financial institutions you deal with do not need to “verify” the information they already have on you. Immediately delete all such emails. Report it immediately to the Canadian Anti-Fraud Centrehttps://www.antifraudcentre.ca, by phone to 1.888.495.8501 or by email to info@antifraudcentre.ca (CAFC) and your local law enforcement department.

Vishing – Similar to phishing above, but the fraudsters call you directly and pose as an employee of a financial institution or direct you by e-mail to call a number. They can even disguise call display so that it looks like the call may be legitimate. Your financial institution does not make calls like these. Ignore the call, hang up and report it to the CAFC and law enforcement.

Pharming – This is a term used to describe what a fraudster or hacker does to redirect traffic from a legitimate website to a fraudulent website without the victim knowing it. The scammer then harvests the data entered by the victim, thus the play on words – farming. Report such items to the CAFC and law enforcement.

Spoofing – This is the term used when a fraudster uses software or some other internet tool that allows the fraudster to mask their real identity by displaying a fake e-mail address or name and telephone number on your computer or telephone. It is meant to both hide who they really are and to trick you into thinking you are either dealing with a reputable business or person but also to give you the impression the call or message is coming from somewhere other than the actual location. Your telephone or Internet service provider have the ability to determine the true IP (Internet Protocol) address or telephone number but they must be informed quickly. They usually only provide this information to law enforcement in the course of an official investigation. Report to the CAFC and local law enforcement.

Shoulder Surfing – Someone hovering nearby while you are entering the PIN for your bank or credit card. If they get your PIN and skim your card (phoney machines used to steal your digital information) or pick your pocket or purse, they can clean out your bank account in no time. They may even use the digital camera feature of a cell phone. Beware of people around you that may be able to view your PIN as you enter it on a keypad. Shield the keypad with your other hand or your body. If someone is aiming a cell phone in your direction when using your cards, block the view of your card and stop the transaction until they’re gone.

Dumpster Diving – An information thief goes through garbage or recycling bins looking for account information. With an old bank or credit card statement, cancelled cheques, discarded junk mail credit card offers and some over-the-counter technology, a thief can open an account in your name and make off with the money. It may take you years to clear your good name. Shred all old bank and credit card statements and any pre-approved credit card offers you receive in the mail. It’s a good idea to do this for any papers you have that contain any information about you other than name and address.

Pump and Dump – A fraudster buys a block of low priced penny stocks and sends out millions of spam e-mails. The e-mails can be quite compelling and look like a hot tip. Those that fall for this actually fuel a demand for the stocks that the fraudster sells at an inflated price, sticking the new buyer with a loss. Ignore all such emails. A good spam filter should block most for you. In addition, always report such incidents to the CAFC, local law enforcement and your provincial securities commission.

If you are a victim of fraud or identity theft, always notify law enforcement immediately and then notify credit bureaus and card issuers as appropriate.

My next blog will go through some other common scams that use fraud and identity theft – sometimes together, sometimes separately, but the damages can be horrendous.

With courtesy to Wikipedia, the Canadian Anti-Fraud Centre, the Canadian Competition Bureau and the Globe & Mail.

Protect yourself from Identity Thieves!

Andrea told her husband Jack that she had noticed a young person going through their condo paper-recycling bins. At first, she thought they were just looking for recyclables which could be turned into cash, but later realized the person was rummaging through all of the containers that were paper-products only.

These bins often contain bank statements, cancelled cheques, private letters, other important documents, credit card statements and envelopes. If the information is from a business office, old client files and related data can often be found. There have been stories in the news about scavengers going through people’s waste and recyclables specifically looking for these items. The information that can be obtained is very valuable to information thieves and can be potentially damaging to you.

Credit Card Statements – Just how valuable is your credit card number to a thief? One couple was vacationing in Montreal when their credit card information got into the hands of an organized crime group in Mexico. Overnight their card had been maxed out. How would you like your next vacation to start this way?

Bank Statements – With an old bank statement, a cancelled cheque and a little bit of today’s technology, anyone can easily print up cheques drawn on your account and forge your signature. You can imagine the havoc this can create.

Envelopes and Magazines – Check your name and address on the magazines to which you subscribe and the notices you receive and you will often find your account or membership number is displayed. With that number, anyone can gain access to your member or account information and re-direct your mail. In some cases, this can be done on the Internet. If someone can re-direct your mail, would you wonder what else they might be able to accomplish?

Office Waste – The information that can be found in discarded office material is very valuable. It can contain confidential information on your customers, correspondence from companies with which you deal, statements of account, customers’ account data, quotations, billing information, purchase orders, etc. Would you like a competitor to get their hands on any of this information? What about your customer’s own identities – could they be stolen from information you discard?

Andrea and Jack decided to foil the information thieves by buying a personal paper shredder for less than $100. They now shred all papers containing anything other than their names and addresses. Though a determined thief might piece the shredder’s output back together, stirring it up should make this practically impossible.

The Canadian Anti-Fraud Centre (www.antifraudcentre.ca) is an excellent resource regarding all types of fraud including Identity Theft. Here are some quick tips from their website.
1. Before you reveal any personally identifying information, find out how it will be used and if it will be shared, and with whom.
2. Pay attention to your billing cycles. Follow up with creditors if your bills don’t arrive on time.
3. Use passwords on your credit cards, bank and phone accounts. Avoid using easily available information like your mother’s maiden name, your birth date, the last four digits of your SIN or your phone number.
4. Minimize the identification information and number of cards you carry in your wallet or purse.
5. Do not give out personal information on the phone, through the mail or over the internet unless you have initiated the contact or know with whom you are dealing.
6. Keep items with personal information in a safe place. An identity thief will pick through your garbage or recycling bins. Be sure to shred receipts, copies of credit applications, insurance forms, Physicians’ statements and credit offers you get in the mail.
7. Give your SIN only when absolutely necessary. Ask to use other types of identity proof when possible.
8. Don’t carry your SIN card; leave it in a secure place.

In my next post, I will share some thoughts on other types of fraud and identity theft – including the internet, your telephone and RFID scanners!

It’s Time to Buck the Trend of Increasing Personal Debt

by Bert Griffin

 

As a financial planner with over 18 years of experience, I know the type of toll personal debt takes on an individual’s well-being and state of mind. A major part of my job as a financial planner is to assist my clients in the growth and protection of their wealth and, in the situations in which debt exists, to look for solutions that will effectively reduce it. Over the years, I’ve been proud to know that, on average, Canadians have managed to steer away from taking on heavy loads of personal debt, an historical trend that has been quite the opposite of our American neighbors.

That’s why it’s so unfortunate to learn that in the last several years, Canadians have proven increasingly willing to veer into the red when it comes to their personal finances, and to veer into it in a major way. According to TransUnion, one of Canada’s two credit bureaus, the average Canadian’s consumer debt (that is, non-mortgage debt) rose by more than $1,500 to a record $27,485, between 2011 and 2012. This is a number that many believe will likely increase as 2013 draws to a close.

The fact that Canadians are quietly though quickly catching up to Americans as far as their level of personal debt is indeed troubling. After all, a broad rise in consumer debt has the possibility of threatening many aspects of our economic environment. It has the possibility of threatening our economic recovery, the vibrancy of our real estate market, the likelihood of students to attend programs of higher education, and the list goes on.

Because personal debt is so insidious and because I find it so alarming that more Canadians are taking on higher amounts of it, I thought it would be an apt time to quickly talk about debt reduction strategies. These are debt solutions that I consistently recommend to my clients and which have been known to work.

Pay More than the Minimum on Credit Card Debt

We all know the danger that high interest rates on credit cards can pose. We also know the unfortunate situation of being able to only pay off the interest on a credit card debt and never the principal. That’s why being able to put oneself in a financial situation in which one can pay off on a monthly basis more than the minimum amount on a credit card(s) is so incredibly important. Even if the amount is $30 or $40 more than the minimum, over time the principal will be reduced.

Buy a Practical, Used Car as Opposed to a New Car. And, If You Can, Consider Moving to a One-Car Household

This is another point that some may consider as Personal Finance 101, but it’s important to mention. Many people fail to realize just how expensive a car can be and just how much of a chunk it consumes in one’s finances. The initial cost of buying a car is obviously one expense; but, a host of other costs follow the car’s purchase, such as its regular fuel costs, the costs to insure it, as well as repair it and, again, the list can go on. It’s for this reason that in order to reduce personal debt, if there’s an opportunity for a household to go from a two or three car household to a two car, or ideally, a one car household, it should be strongly considered. The savings that result can be truly significant.

To add to this point, an individual or family that is in serious debt would be advised to not consider buying a brand new car. We all know how quickly the value of new cars deteriorate and for an individual or family that is in the red, throwing money out the window on a new car will simply add fuel to the fire.

See If You Can Consolidate Your Loans

A final debt management solution that I would like to mention is the idea of consolidating a number of consumer debts into one loan at a reasonable interest rate. Although this can be a great strategy for debt reduction, it truly requires a sit-down with a financial advisor in order to make sure that, one, an individual can actual consolidate their debts and, two, that a proper financial plan is in force, once the debt is consolidated, to actually pay off the loan.

From loyalty programs to the true cost of credit cards

Moving past the cost of loyalty programs to credit cards

My last blog covered how the costs of all the loyalty programs are passed along to all consumers – even those who don’t belong to such programs. Credit card costs have been in the news a great deal in 2013 and even received a mention in the Speech from the Throne that opened the new Session of Parliament.

Most readers will remember the Competition Bureau finding earlier this year in FAVOUR of credit card fees being passed along to all consumers rather than just those who use the cards. The issuers of the credit cards were, of course, ecstatic with the ruling – merchants not so much and consumers not at all, but then, cynic that I am, did anyone really expect the Bureau to side with consumers over large financial institutions – both national and international in scope?

So let’s do some math (sorry). For simplicity, I will use a card issued in three flavours – a basic, no-fee, no-reward format (Bronze), a fee-based card that also provides extra loyalty bonuses in the form of “points” redeemable for merchandise gifts from the issuer’s pre-selected catalogue (Silver) and the third is a Gold card (also fee-based but at nearly twice the level of the Silver card) that gives points that can be redeemed for travel – allegedly unlimited travel without blackouts and restrictions.

Having operated business that accepted credit cards, I know all too well the costs involved. First the merchant pays a fee to be able to accept each type of credit card. Then they have to rent at least one of those ubiquitous terminals that work at least some of the time. Their banking institution will sometimes charge an additional processing fee to handle the credit card vouchers while other card issuers have a fixed-fee arrangement (as a percentage of the TOTAL amount charged, including tips and taxes!).

A typical fee schedule for this hypothetical card series would look like this:

Card User Charge Merchant Charge
Bronze $0 annual fee 1.75% of total amount charged
Silver $120.00 annual fee 3.15% of total amount charged
Gold $225.00 annual fee 4.65% of total amount charged

I am NOT quoting fees for ANY specific credit card currently in use. These are illustrative only and roughly represent a mid-point of charges currently at work in our economy. Each card issuer and supporting financial institutions are completely free to set (and change) their own fee schedules.

With these fees charged to the merchants and vendors on the total amount put on the purchaser’s card, it is no wonder that the card companies and issuing institutions are raking in obscene profits at the expense of both the merchant and consumers – regardless of their incomes.

If you were a merchant, how much of these merchant costs would you include? 1.75%? 3.15%? 4.65%? Plus somewhere the cost of “buying into” the use of the card and terminal rental has to be included – the merchant can’t afford to take any loss with margins being so tight!

Most users today have either a Silver- or Gold-type credit card so the merchant has to plan for at least the Silver fee and a large percentage of the Gold fee – say 4.15%? On everything. Whether the purchaser pays in cash, uses a debit card (there are fees for these cards too but are usually less than .60% depending on merchant volume) or a credit card. Oh, the merchant also pays GST and possibly PST on top of these fees!

The low and modest income person or family who can’t qualify for any credit card, well, they are all still is paying the fees. Is this fair? This says nothing of the usury interest rates of sometimes more than 24% being charged on any outstanding balances.

Make sure you understand the costs and how they affect you!

Loyalty and rewards programs – free??

A conversation with one of my grand-daughters

I always enjoy chatting with Jeannette – 23, very smart – we starting talking about “free flights” from a well-known loyalty program used by many retailers. I asked her if she really thought they were free – and she said yes. She had never been charged any extra money when she handed the retailer this card so she figured the rewards were free.

So we discussed that and finally it dawned on her that since the flights did in fact cost money (if she wanted to take the trip on her own without the loyalty “points”) someone was paying for them. So now she had to figure out who was paying and how much they were paying.

I explained that the retailer who accepts such cards (including credit cards that have loyalty programs attached to them), is paying a percentage of the sale amount to a loyalty provider and in turn the loyalty provider (after deducting expenses and of course some profit), uses the net amount as electronic cash (actually an early concept version of Bitcoin) and pays the airline or cruise line or hotel or resort accordingly at some pre-negotiated discount rate.

Time for some numbers – and I will EXCLUDE the fees charged by credit cards just for the sake of simplicity.

A typical loyalty program works their calculation backwards starting with how many “points” they want people to accumulate before they can have a “reward”. So let’s assume the program provider decides to track process in multiples of 100 “points”. By going to various vacation-type providers and after some negotiations with them, the provider figures that 100 “points” needs to have a nominal “cash” value of $150. So 1 point = $1.50. Next, the provider has costs to administer the program and they estimate it costs them $15 to do the administration behind the $150 nominal value. Next, they decide that a reasonable profit is $5.00 per $150 of nominal value. So where are we now?

We need $150 plus $15 plus $5 = $170. So how much does the loyalty provider charge the retailer or merchant? The retailer decides that a customer will need to spend $50 to get 1 “point”. So 100 points means the customer has to spend at least $5000. Time to calculate a product markup to cover this added expense.

170/5000 = 3.4% markup on all products to cover the cost to the retailer of this loyalty program. This is a mark up on EVERY product they sell. It is a markup to EVERY customer or client WHETHER OR NOT they belong to the rewards program.

You are paying for the program whether or not you use it. So you may as well get it and use it since you pay for it regardless! Oh, by the way, PST and GST are added on TOP of this cost too since it is embedded in the item cost – so increase that by 12% in BC!

My next blog will compound the cost of markups when credit cards are involved!