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Mark Huber, CFPSetForLife Financial ServicesTel: 604-207-9970 [email protected] http://www.HowToBeSetForLife.com
When it comes to debt, all your eggs do belong in one basket
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Conducted through the IFID Centre by Moshe Milevsky & Maritz Research
1,261 Canadian homeowners surveyed between September 15 – 21, 2005
The research study
The survey by Maritz Research conducted between September 15 – 21, 2005 of Canadian homeowners has a margin of error of +/-2.73 per cent, 19 times out of 20. The number of Canadian homeowners surveyed was 1,261.
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55% of Canadian homeowners surveyed have household debt
Many with different Types of debt Interest rates
different Creditors
Maritz Research survey
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By spreading out debts at different interest rates Known as
“Space diversification”
Canadians are losing money
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Consolidate at one low interest rate
Only 33% had tried this approach Nearly 40%
thought there was no advantage to consolidating
How you can stop losing money
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In one line of credit, combine debts and short-term savings
Don’t let money wait in low interest accounts while debt accumulates in higher rate accounts Known as “time
diversification”
Another key to the most savings
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Two families with identical debt
Each family Owes $94,709 Contributes
$1,000 toward repayment each month
Case Study Part 1: Diveronicas vs. Consuelos
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Diveronicas payments
Monthly Payment
Interest rate
Mortgage $516.00 5.35%*Auto loan $320.90 7.93%Credit card Minimum
paymentLine of credit Balance
Remainder of $1,000.00
Total payments $1,000.00*Based on 20 year amortization period and an assumed fixed three year term interest rate
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Consuelos payments
Monthly Payment
Interest rate
MortgageAuto loanCredit card
Line of credit $1,000.00 4.5%
Total payments $1,000.00
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On average, Consuelo family will owe $929 less
after year 1 $970 less in
the second year
Which family is better off?
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Would still see significant benefits in years 1 and 2
After the 3rd year of increase, this ends Debts best kept separate if:
Short-term interest rates are above mortgage rates
What if interest rates go up?
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Eliminate space and time diversification
Complete consolidation strategy
All the eggs in one basket
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Same debt - $94,709
Same monthly payment amount - $1,000
Difference: Diveronicas maintain a savings account with a $2,700 balance
Case Study Part 2: Diveronicas vs. Consuelos
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After year 1, the Conseulos will have $3,763 less debt
Overall, the Conseulos will be better off by: $1,063 after year 1 Additional $1,289 at
the end of 2 years
So which family is better off?
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Consolidate all your debts at as low a rate as possible
Make sure you don’t have excess cash sitting around
Make sure to pay down your debts, and in a sense, earn a much better after-tax rate of return
Learnings from the study
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Thank you
For a full report of the study conducted by Maritz Research, visit www.ifid.ca/research.htm
Thanks to the IFID Centre for all references made to the study findings.
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Important note
The commentary in this presentation is for general information only and should not be considered investment or tax service to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.
Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial and its subsidiaries in Canada. As one of Canada’s largest integrated financial services providers, Manulife Investments offers a variety of products and services including: segregated funds, mutual funds, principal protected notes, annuities and guaranteed interest contracts.
Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation.
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