Step 2: Eliminate Bad Debts part 3 — Paying Down Debt

As a rule, you will usually pay down your debts with the highest interest first, using three ways:

1. Closed Circle: Establish budget totals to determine your available income to service debt on a monthly basis.
2. Overflow / Abundance – As you close your circle and take control of your finances, you will have overflow that will allow you to get out of debt faster.
3. Debt Reduction Strategies – There are several strategies that can help you get out of debt such as debt consolidation.

Step 2: Eliminate Bad Debts part 2 — More about DEBT

Many people are trapped in the circle of bad debt, borrowing money all the time to purchase things that will only drop in value, or depreciate, such as an automobile or a plasma TV. Sometimes, people even have to keep borrowing money to keep up with paying debt, becoming slaves to interest.

It is alarming the gigantic debts being run up by Canadians, often thanks to credit card companies’ handling out credit cards like candy. Credit Cards should be used for monthly expenditures and paid off every month in full. Never pay Credit Card interest!

Interest and Carrying Charges Deduction

If you borrowed money to invest you may be able to deduct the interest and charges associated with the borrowed funds. The main exception to this is if the borrowed funds were put into an RRSP, TFSA or your personal residence. However, if it is a qualified investment and you are claiming investment income, you may be able to deduct the interest and fees paid on the borrowed funds, fees for managing the investment, safety deposit box fees, associated accounting fees, brokerage fees and investment counsel fees. If you have a mortgage on your personal residence and you have other assets or investments that can be turned into cash you may be able to begin transitioning your personal residence mortgage so that you are able to deduct some or all of the interest paid. Considering personal mortgages are one of many peoples’ biggest expenses why not make the interest a tax deduction. To learn more on this see our blog “Making your Mortgage Interest Tax Deductible.”

Tax Deductions

Many Tax Deductions can be split between spouses. For example moving expenses can typically be split between spouses, as long as it is a family move and a legitimate moving expense claim. Child Care expenses are typically claimed under the lower income earner except for in specific circumstances. The RRSP deduction is claimable by the contributor, but the other spouse (the Annuitant) may receive the income when you withdraw the RRSP. This is very beneficial when the spouse in the higher tax bracket has large RRSP contribution room and can “Shift” income to the lower income spouse. Interest and Carrying Charges is another example of a tax deduction that can be split. To do this you must structure your transactions compliantly from the loan to the investment.

Increasing Interest Rates in Canada

http://www.financialpost.com/news-sectors/economy/story.html?id=2631601

This article in the Financial Post eluded to the possibility of Interest Rates increasing in Canada as early as July 2010. Originally the projection for the beginning of the increase was to be in October, then retracted to possibly September, now maybe July? Canada went beyond the projections for 2010. Over the last 2 quarters of 2010 output was increased in Canada and it was announced that inflation was increasing at a faster rate than expected. As demand in the economy increases so does interest rates typically rise. Is the economy coming back or will there be another major downturn? In many of the financial downturns in history there was a big down swing, followed by a short up swing and then a bigger down swing! Because much of the East Coast in Canada is still suffering from the recession we need to still keep the cost of living low. People cannot get caught up in the media hype that states the economy is rebounding at a fast rate. As we’ve seen in the past when economies rise at a fast rate it is not sustainable. Even though core inflation is stated to remain under 2%, that does not mean that true inflation is not rising at a rapid rate.

For more information on the Core Consumer Price Index Inflation vs. True inflation, please check back here in the next few days for my new blog entries.