When it comes to buying a new car, you have three options: purchasing it with cash, purchasing it through a loan (also known as financing) or leasing it. For most shoppers, the decision comes down to buying or leasing.
On the surface, the differences between leasing and buying a vehicle seem fairly straightforward. Leasing a car means you’ll usually have access to a new set of wheels every few years; buying it likely means that you plan to drive the same car for a much longer period of time. Leasing usually includes a warranty that covers most of your repairs; buying means accepting larger repair costs, which are inevitable as the car ages. Leasing agreements can limit your mileage and your ability to customize your ride; buying means you can put as many kilometres as you want on the car and customize it however you’d like.
Looking only at the comparisons above, you might conclude that buying a car is a more practical and economical option than leasing a car—but if that’s really the case, why are monthly lease payments so much lower (often 40% lower!) than monthly loan payments? Why is leasing considered more expensive in the long term if you’re paying less on a month-to-month basis? To answer these questions, let’s take a look at the concept of depreciation.
Depreciation means a loss of value over time. New cars are a textbook example—you’ve likely heard that a car loses thousands of dollars in value the moment you drive it off the lot. That’s accurate, and that’s depreciation at work (and yes, it can be kind of depressing).
All cars depreciate in value over time, but the steepest drop happens in the first three to five years, as you can see below:
- Brand new to 5 years old—the car depreciates by 15% to 20% of its value each year
- From 5 years to 10 years—the rate of depreciation slows slightly to 10% to 15% of its value each year
- 10+ years—the rate of depreciation tends to level out to less than 5% a year. By this time, the car is usually worth less than one-fifth of its retail price!
Depreciation takes its toll on the value of every vehicle. However, your decision to lease or buy will have an effect on how that depreciation influences your finances.
When you finance a car, you own it once you pay off the loan. This means that you personally take the hit on its depreciation, but it also means you also “own” its residual value. Although that value depreciates over time, if there comes a time when you’re ready to sell it or trade it in, you get the benefit of that resale or trade-in value.
By contrast, when you lease a car, you never actually own it. The company that leases the car to you is responsible for selling the car once you’ve completed your lease term. The leasing company also ultimately deals with the car’s depreciation in value. You get to drive a brand new car without needing to think about its loss in value. That sounds pretty great, right? In reality, even though the leasing company deals with the eventual sale of the car, you’re the one who makes up for its loss in value through your monthly payments. That payment includes an estimate of how much the car will depreciate by the time your term is up. Monthly payments are lower because you’re not paying for the entire car—you’re just paying for how much the car will depreciate in those few years that you’re driving it (a period of time when, coincidentally, the car depreciates the most).
When you finance a car, the monthly payments are higher because you are paying for the entire car, plus interest on the loan. When you pay the loan back, your monthly payments stop (unlike leasing payments, which continue as long as you’re still leasing) and even though your car will have depreciated in value by that point, you will own the remaining value.
As with any major financial decision, there are also other factors that come into play. You need to be realistic about your budget and honest about your lifestyle, and you need to figure out what’s most important to you as a new car owner. How comfortable are you with the limitations set by a lease agreement? How prepared are you to pay for eventual car repairs? Will driving a new car every two to three years be worth thousands of dollars more in the long run? To some people, it might be—it all depends on a combination of your personal needs and preferences.
An emergency fund is an essential part of your personal finances. Its importance is stressed in almost every personal finance book and budgeting blog, and yet 27% of Canadians have one month or less of expenses in their emergency fund.
If an emergency fund is, in fact, so important, why doesn’t it seem that way? Why is it so easy to procrastinate on emergency-fund saving?
The term itself could be a source of confusion. The word “emergency” brings to mind images of car crashes, natural disasters and terrible accidents—and although these are valid examples of emergency expenses that affect people all across the country every day, they’re extreme enough that it’s difficult to imagine ourselves in those situations. It can be difficult to set aside a large chunk of change for emergencies when you “just don’t feel that your car is going to break down today”. Our wants (or discretionary spending) often feel more immediate than our need to cover hypothetical and unpredictable emergency expenses.
The reality is that emergency expenses come in many forms and that there are less traumatic examples out there that would be equally good at messing up your financial situation, so it might make more sense to think of your emergency fund as a “life happens” fund.
But, whatever name you give it, absolutely everyone needs an emergency fund in place because no one is exempt from life’s surprises and obstacles—and while we can’t completely prevent emergency situations, we can at least limit their potential damage. An emergency fund allows you to respond immediately to financial emergencies, which allows you to handle the situation without having to deal with additional stresses like struggling to make ends meet or spiralling into a cycle of debt.
If an expense is unexpected (or it results from an unexpected circumstance) and it has the ability to derail your regular cash flow, then it’s an emergency expense. By that definition, a delayed insurance reimbursement is as much of an emergency expense as a meteorite landing on your car. The important part is being prepared for those expenses, no matter how mundane or how extreme they turn out to be.
Let’s look at what types of expense should—and shouldn’t—be dealt with by an emergency fund.
Expense Type #1: Known unknowns
“Known unknowns” are situations that we can partially anticipate—so this is the type of expense that should not be dealt with by an emergency fund. These situations are on our radar (known), even if we don’t know exactly when they will happen (unknown). For example, if you own a vehicle, you know that at some point it will need repairs, just like you know that your home will eventually need a new furnace or that your pet will eventually need a visit to the vet.
A good budgeting exercise is to make a list of all the known unknown expenses you can think of. Then compare the list to your budget and see if there are any categories you’re not currently saving for. Odds are that there are probably a few areas your current budget doesn’t cover, so you’ll want to adjust it to include these additional categories.
Expense Type #2: Unknown unknowns
“Unknown unknowns”, which are the types of expenses that emergency funds are truly designed for, are situations that take us completely by surprise. We don’t know when they will happen, how much they’ll cost or even what they will be until they’ve happened. For example, a family member could suddenly fall ill and you need time away from work in order to care for them. Hopefully, you’ll never experience an unknown unknown, but if you do, the knowledge that you have an emergency fund to cover additional expenses will undoubtedly help to ease a stressful situation.
Expense Type #3: Underestimated known unknowns
Although your emergency fund is not intended to cover known unknowns, if one of those situations has spiralled into a bigger-than-expected expense, that is something your emergency fund would be able to cover. For example, although you have a budget for regular vet visits, you discover that your beloved pet needs surgery, which will cost $2,000. Or you might have savings to cover your car insurance deductible, but it takes three months longer than expected to receive reimbursement from the insurance company. In these situations, it makes sense to dip into your emergency fund to cover an underestimated known unknown.
How much money should be in your emergency fund?
Emergency funds vary widely from person to person. The regular recommendation is six months’ worth of expenses, but some prefer having nine months’ or a year’s worth tucked away. It’s a significant amount, as it should be—it’s what you would be living off if you didn’t have an income for an extended period of time. Whatever amount you choose, it’s a hefty savings goal and it will take time to meet it, but it will make all the difference in tough times. When setting your emergency-fund savings goal, consider the following:
- Set mini-goals: Saving six months’ worth of expenses might sound downright impossible right now—and that’s a completely normal reaction. Instead of feeling overwhelmed and giving up on the idea, choose a smaller goal and then gradually increase it over time. When you’re just starting out, aim for $500 in your fund; once you’ve reached that goal, congratulate yourself and then set a new goal of $1,000. Once you get there, consider setting weekly or monthly contribution goals to stay on top of your savings.
- Avoid wishful thinking: According to a 2014 Workopolis survey, it takes four months on average to find a new job. When planning your emergency budget, you might like to think that if you lost your job, you could turn it all around in two weeks—but that could be setting yourself up for a very stressful situation. It’s not fun to think about a worst-case scenario, but when it comes to emergency-fund planning, that kind of thinking can help you come up with a more realistic savings goal.
- Imagine your lifestyle: If you had to quit your job in order to handle an emergency situation, what would your lifestyle look like? Would you be willing to rough it until you found a new job? Or would you need things to stay pretty much the same to stop your stress levels from skyrocketing? Consider your desired lifestyle carefully when planning your emergency fund. If maintaining your current lifestyle in times of emergency is a priority to you, you may want to save nine months’ worth of income, rather than nine months’ worth of expenses. But if rolling with the punches and going back to a diet of ramen noodles while you figure things out is more your style, then a smaller emergency fund would likely be able to meet your needs.
Ultimately, your emergency fund is about your peace of mind. Design it to fit your specific needs.
While bank and banking are universally understood and accepted terms, the term credit union is still largely misunderstood and unknown to many. Credit union is an unusual term, isn’t it? Is it just another name for a bank? Is it a credit card company? Do I have to be in a union to join?
But, just like Jackson or Smith, Credit Union is our last name and we’re proud of it. It does beg the question, though—where did the name come from? We need to go way back to find the answer to that question and to understand the origins of credit unions.
The first working credit union models sprang up in Germany in the 1850s and 1860s and, by the end of the 19th century, credit unions had taken root across Europe. These upstart financial institutions, which drew inspiration from co-operative successes in other sectors, including retail and agriculture, went by a variety of names, including people’s banks, co-operative banks and credit associations. Some notable brand names from the time: the People’s Bank of Belgium, the People’s Bank of Milan, the Co-operative Bank in England, Crédit Mutuel in France, Casse Rurali Loreggia in Italy and the Anyonya Co-operative Bank Limited in India.
While these early credit unions had slightly different names, they were all best identified by their adherence to co-operative principles, especially those related to membership and control. Essentially, a co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. These enterprises are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.
The first credit union in North America, the Caisse populaire de Lévis in Quebec, began operations in 1901 with a 10¢ deposit. Founder Alphonse Desjardins, a former journalist and the French-language stenographer for the House of Commons,, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered to pay nearly $5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a distinctive parish-based model for Quebec: the caisse populaire. The literal translation of caisse populaire is “popular cash register”, which speaks to providing access to cash and credit to people with limited income. These people were considered as less desirable customers by the established banks, who were in business to turn a healthy profit.
Did you know that St. Mary’s Bank of Manchester, New Hampshire, which now uses the term bank instead of credit union, was actually the first credit union in the United States? Assisted by a personal visit from Desjardins, the then-named St. Mary’s Cooperative Credit Association was founded in 1908 by French-speaking immigrants to Manchester from Canada’s Maritime provinces.
Unlike the credit unions of Germany or Quebec, quite a few credit unions in the English-speaking provinces, as well as most credit unions in the U.S., emerged from an employer-based bond of association. In addition to the advantages of access, information and enforcement that resulted from members sharing the same workplace, the employer-based bond permitted credit unions to use future paycheques as collateral.
Although the word ‘credit’ might make you think that the earliest credit unions offered only credit services, they usually also offered savings services, and often payment and insurance services as well. The word ‘union’ can also be confusing. At first blush, you may think that members of a credit union need to be member of a labour union, but that’s not the case. Members are simply united together because they share a similar situation. This affiliation can be where they live, where they work or what they believe in.
While ‘credit union’ may be a bit harder than ‘bank’ to grasp, it’s our name and we’re sticking with it! To paraphrase Shakespeare’s Romeo and Juliet, “A rose by any other name would smell as sweet”.
On June 9th, First Credit Union celebrated its 77th anniversary. Since we opened our doors in 1939, the way we do business has changed significantly (it’s hard to remember what we did before computers came along!); but what hasn’t changed is our personalized, hands-on approach to helping our members and our community.
We believe in engaging in activities that result in connecting with members and the communities we serve. Community Impact Day is an opportunity to work alongside non-profit organizations painting, weeding, building fences and clearing brush for a few hours – a powerful way to connect with our community.
This year’s Community Impact Day will be taking place tomorrow, June 16th–please be advised that all of our branches will be closing early at 2pm while we head out to volunteer! To get a better idea of what Community Impact Day means to our staff, our local non-profit organizations, and our communities, check out this video from last year’s event that achieved such great success that this project has become annual.