A Big Question, Lots of Answers, A CONTEST, and Thank You!
Posted by John Draper | Filed under Insurance, Money Management, This & That
I recently received a mighty big question from NM and thought I’d share it and my answer here since she is asking a lot of the same things many other people are asking and I can kill many birds with this one stone. NM writes:
I recently bought your book and in it, you suggest Disability Insurance, Critical Illness Insurance and Life Insurance. I’ve made a spending plan and am trying to figure out how/when/where these insurance products would fit in. Now that you’ve convinced me insurance isn’t evil, I’m wondering… I’m 24 (about to turn 25), single, and I just started a new job in June grossing $33,000/year. I have about $6,500 owing on a line of credit at 8.5% interest and $2,000 on a credit card at 19.97% interest. My question is: do I need all three types of insurance? Should I get them now or wait until I pay off my debt? And how do I figure out how much disability or critical insurance I would need? I’m assuming that once I move out on my own or collect any assets I would need to look in to getting Critical Illness or Disability insurance?
NM, since you are single and young, you’re most important insurance step is to get disability insurance. Not any old disability insurance, but the very best disability insurance you can afford. (Tomorrow I will post a guest blog on disability insurance from a Guy In The Know, so read it.) Life insurance is important when you have assets and dependants, and since you have neither, and are still very young, this doesn’t have to be a priority. Critical Illness insurance is also useful, but I often recommend it for those who can’t get disability insurance because they are old, and that’s not you. So, the best DI you can find, m’girl, that’s what you’re after.
NM went on to say:
Speaking of debt, I plan to pay off the 19.97% interest credit card debt and then start an emergency fund (meaning I will have a very small emergency fund until I pay off that high interest credit card). I was then going to put away about $300 per month for emergencies. 5% of my income goes in to my company’s pension plan; I was also thinking about increasing those contributions once I pay off the credit card. Should I save less and continue making huge debt repayments? Or should I work on boosting my savings even though it would take me longer to get out of debt?
Also, my company’s pension plan acts like an RRSP in that my income is taxed after the contributions are deducted. My company also matches my contributions. The plan is locked, meaning I can’t get to the money until I retire. Is there any downside to having this type of a pension plan (for ex. I can’t borrow against it to get a house, etc.)? I want to contribute the maximum to this plan, but I’m wondering if I should also get an RRSP?
Thank you for this book–I can hear your voice talking to me through the pages! I plan to use it to guide me in to being a Woman of Independent Means.
Good questions all, NM. Focusing on getting your debt repaid is the right thing to do, particularly since you are not ignoring either your long-term or emergency savings. When I work with my fams, I often start them off saving only $100 a month for each, just to get the habit established. You’re already doing this so go nuts on the debt repayment.
Since 5% of your income goes toward your company pension plan (which is fine, by the way) and they match your contributions, that means you’re saving 10% long term. Perfect. And $300 a month for emergencies until you get to the months’ worth of Essential Emergency Expenses is terrific. As for not being able to borrow against your retirement savings for a home, I’m not a huge fan of this strategy. Once you have all your consumer debt paid off, take the money you were using for debt repayment and start building a Home Downpayment Fund.
I’m glad you’re enjoying A Woman of Independent Means. It’s always good to hear when people are using the book to make more sense of their money. I’m working on an outline for a new book, but if you stay this course you’re on, you won’t need it! Ha!
This is my final blog of the year, so I want to wish you all a very healthy and happy 2009. Last year I made a resolution that kept me sane through all my ups and downs. Being the stone in the river was one of the things that got me through the tough changes at the end of the year. (All your hugs and my emergency fund were the other two.)
We have been in our new home now for almost a month and things are settling down and developing a rhythm. I want to thank you all from the bottom of my heart for all your good wishes and kind words. I believe that it was being wrapped in your positive energy that made the last couple of months bearable. Now I can hardly wait to see what 2009 has in store for me!
The best to you all. I am so proud of so many of you for seeing the light and taking control of your money and your lives.
Hey, I’m almost out of success posts, so if any of you want to share your stories, please send them along so everyone else can be inspired by you, or can share their wisdom with you to help you along.
One more thing: Since we’ve covered a lot of ground in the past year, is there anything in particular you’d like more information about? I already know you want more on investing, so I’m going to work up some stuff on that. Anything else?
Cheers, with heaps of love, and great big hugs.
December 30, 2008 at 9:45 am
Great post Gail! Wish I’d asked these questions 30 years ago. I’ll get your ‘A Woman of Independent Means’ and read it anyway ;o)
I, too, am proud of so many of the contributors here. I love to read where they’re at, what they’re up to – they have so many great ideas. And, they are starting out early in life to make themselves debt free and someone to be reckoned with!
For all the frustration and confusion most have with handling their finances, I’d say the positive and optimist vibe generated here goes a long way towards everyone’s success!
See you next year Gail…..my mantra is “2009 is going to be FINE” for all of us!
December 30, 2008 at 9:45 am
My husband has some insurance through his work, but we need to get some life insurance outside of his work incase anything happens outside of work. We will probably go with Sunlife as thats the company that deals with his work. We have two boys and are currently renting so really we just own an old car for now.
December 30, 2008 at 9:55 am
Gail:
Have a great 2009, and keep this Blog growing ! I love reading it every day. Enjoy the new year, and thank you for sharing with all of us your knowledge and making sure that we all take good care of our hard earn money.
Emiliano
December 30, 2008 at 10:05 am
Voting for my wife
Angela W
December 30, 2008 at 10:06 am
happy new year gail. i’m glad you are settling in to your new house and that you had the cushion of your emergency to help see you through tough times.
i’ll have to get some people to come vote for me.
December 30, 2008 at 10:11 am
Hi Gail, we love your show! I’m voting for my friend dinah, she really wants to win
December 30, 2008 at 10:17 am
Hi Gail. Dinah is always talking about you so I have to vote for her.
December 30, 2008 at 10:37 am
Voting for Dinah!
December 30, 2008 at 10:38 am
Love your show Gail! I’m voting for my friend Dinah, I know how much she loves your show and all your advice.
December 30, 2008 at 11:00 am
Big Fan of your show, Gail! But not so much as my friend, Dinah, this much I know! I just have to vote for her.
December 30, 2008 at 11:05 am
Hi Gail
Thank you so much for being the catalyst of change in my life. I’ve been working at this budgetting process now for over two years and since I started reading your blogs and archives in July, I have finally realized that it is possible to plan for the other side of debt. I’ve got a way to go but things are falling into place. I need to keep making new budgets to suit the situations which arise. I hope to have a truly workable budget this year to see me financially ahead of the game forever.
I also have to thank you for keeping my toes to the fire each day with your blogs. It’s a good fix for me. I may not have anything to say or add to the comments given but it keeps me on the straight and narrow. Thank you so much for this one and very important tool!
As far as subjects to continue with, I like a mix of subjects which may carry on for a week in some way or other. Interesting ways of viewing different situations – most likely from the practical side of financing and reacting to what some people think about a situation generally.
I have tried to help my sons get financially set up for the next stage of living on their own. Perhaps this could be a focus – where to start – so that you are always prepared and ready financially for the ups and downs of life.
I’m happy to hear of your life getting back on track and hope that the new year will be good for you. We all deserve some peace so that happiness will follow. Keep up the good work, Gail! We need you and your strength.
December 30, 2008 at 11:15 am
@AngelaW – shop the insurance around. You don’t have to go with the company your dh has at work. My dh was denied life insurance from the company he was already covered under at work. I am assuming work plans are a different division than personal plans. We had a great broker who sat down and asked us all kinds of questions and looked at differeny scenerios to make sure we had the right coverage for us.
December 30, 2008 at 11:18 am
Voting for Angela W
December 30, 2008 at 11:21 am
I’m voting for Dinah!
December 30, 2008 at 11:24 am
Dinah has gotten me addicted to your blog. I’ve loved your show for a couple years now.
I vote for Dinah!
December 30, 2008 at 11:26 am
We like the sunlife group because its been around for a long time and have heard many good things about it. Thats why we will most likely go with that.
December 30, 2008 at 11:35 am
I vote for Dinah.
I’m a big fan of your show, Gail!
December 30, 2008 at 11:37 am
Interesting blog – Dinah sent me!
December 30, 2008 at 11:39 am
Vote for Angela W
December 30, 2008 at 11:40 am
Great blog. My vote is for Dinah. She’s your biggest fan!
December 30, 2008 at 11:45 am
Another for Dinah! Great site!
December 30, 2008 at 11:58 am
My vote is for Dinah! I’m a fan too! (even tried out for the show, had a video taped home interview, but I believe not enough relationship problems to get on). Always great info from the show and on your site!
December 30, 2008 at 12:20 pm
Voting for Angela W
December 30, 2008 at 12:20 pm
Vote for Angela Wade. She Rocks.
December 30, 2008 at 12:20 pm
Happy New Year to you, too, Gail, and thanks for all the advice.
I’d cite you as one of the factors in some big changes in my life this year — I got engaged … my fiancee and are out of debt … and we’re hours away from closing on our first home.
Life can get exciting once you take hold of the reins, take responsibility for getting yourself ahead, and not letting yourself be blown about by every wind. Confronting reality and moving forward with determination can pay off. Thanks, Gail, for the loving ass-kickings and detailed wisdom. Looking forward to more.
December 30, 2008 at 12:21 pm
Gail -hi you write “As for not being able to borrow against your retirement savings for a home, I’m not a huge fan of this strategy.”
Can I ask why not? It seems like a pretty smart move, and one that I did. You can either save up in a regular account, then buy into an rrsp (I’d say GIC or similarly safe investment since you’re going to be withdrawing it) and get a big tax reduction, and then 90 days later pull it all out using the home buyers plan and then you have 17 years to pay it all back. It’s like an interest free loan from you to you. Alternatively you could just buy small amounts in your rrsp and then withdraw it using the HBP, so you do get tax reductions over the time it takes you to invest. Just if you are planning on using the HBP, remember that you are investing on a short time horizon and choose your investments appropriately.
December 30, 2008 at 12:29 pm
Another vote for the fabulous Dinah!
December 30, 2008 at 12:33 pm
Hi Gail
Dinah just put me onto your site, i’ve bookmarked it and am looking forward to getting my finances under control with many of your tips
December 30, 2008 at 12:36 pm
Hi Gail,
Dinah has sent me over to the site, and I think it will be an interesting and valuable resource in these scary economic times!
Thanks!
December 30, 2008 at 12:44 pm
Gail~
Have no idea who Dinah is….but she sure has many friends! And, what a friend she is to turn all of them on to this site. I’ll toss my vote to her…..I’ve ordered your planner as part of my January budget.
December 30, 2008 at 12:49 pm
I gotta say, I’m a fan of the HBP too.
Interest free loan with a long amortization. Right now, interest rates are fairly low, but when they’re higher, it can save you a great deal of money. Add a spouse and that’s a $40k interest free loan saving $1600 of interest annually at 4%.
December 30, 2008 at 12:56 pm
Voting For Angela W
<3
December 30, 2008 at 12:58 pm
Great advice, hope my friends Barry & Angela W profit from it
December 30, 2008 at 1:16 pm
Suggested Topics
I have one child in university and another completing gr. 12. I’d like to read more information about helping young adults learn to budget while at post-secondary school or as they first leave the nest.
Another topic that always interests me is creative ways to save money.
Gail – you are doing such important and timely work; and your unique voice is not only refreshing, wise and funny, but ‘wakes us up’.
Best wishes for a great 2009.
December 30, 2008 at 1:20 pm
I VOTE FOR ANGELA W.
December 30, 2008 at 1:27 pm
I vote for Angela W.
December 30, 2008 at 1:31 pm
What an awesome idea! I LOVE this planner – I received it last week! I can’t wait to start using it.
My vote is also for Dinah! You go girl
December 30, 2008 at 2:04 pm
~Vote Angela~
December 30, 2008 at 2:05 pm
My vote’s for Lana! she definitely deserves it
December 30, 2008 at 2:12 pm
I vote for Lana
December 30, 2008 at 2:13 pm
Geoff:
The cons of using RRSP for a down payment.
1- RRSP is meant for retirement and early contributions with the power of interest compounding means a more ccomfortable retirement..
2- You no longer have TAX-FREE GROWTH for the amount withdrawn from the plan. (If it is 17 years to pay it back, that is 17 years at a few percent a year -> less $ at retirement time.)
3- What are the penalties if you can’t afford to pay it back? House payments, heating, hydro, taxes, renos, etc… Few go through the math of the real cost of home-ownership and get in financial trouble (loans, credit card use, get on Gail’s show…). It could become a high-interest loan! The payback amount MUST be in your budget!
4- If there is a big financial mistake and you must declare banckrupcy, older RRSP contributions are sheltered from creditors.
5- If you knew you wanted to buy a home, that is a pre-planned expense so why weren’t you saving for that? Gail separates pre-planned spending from savings.
6- I know I read a VERY good article about this on the web a few years ago (with actual numbers), but I just can’t find it.
There are some benefits…
The only financial one I can think of is:
Only need two to three thousand dollars to avoid higher mortgage insurance for a house that is at an extremely lower price than its true worth and all within your budget!
I left a bank whose advisor insisted that I put my RRSP contribution into a lower paying interest GIC so it would be cashable for a down for a home. My RRSP money is for my retirement, not for a down! The age at which you start your RRSP contributions may play a factor in your decision. School took a long time for me, I need to get the MOST out of my RRSPs.
December 30, 2008 at 2:32 pm
Yeah, what Geoff said…
Off to generate some traffic!
December 30, 2008 at 2:38 pm
I vote for Lana! She’s the best!
December 30, 2008 at 2:40 pm
I vote for Dinah ’cause she just can’t stop talking about you!
December 30, 2008 at 2:43 pm
I vote for Lana
December 30, 2008 at 2:45 pm
Another vote for your biggest fan Dinah!
December 30, 2008 at 2:45 pm
I’m definitely voting for Lana.
December 30, 2008 at 2:47 pm
My vote’s for Lana
December 30, 2008 at 2:47 pm
My votes for Dinah! Love the show!
December 30, 2008 at 2:51 pm
I vote for Lana!
December 30, 2008 at 2:53 pm
My vote is for Lana!
December 30, 2008 at 2:54 pm
Vote for my girl Lana!!!!!!!!!!!! Woot!!!!
December 30, 2008 at 2:55 pm
VOTE FOR LANA SHE RULES!!!
December 30, 2008 at 3:00 pm
I vote for Angela W
December 30, 2008 at 3:07 pm
I vote for Lana!
December 30, 2008 at 3:10 pm
Here to vote for Dinah – she referred me ages ago and I check the blog regularly. Love the show!
December 30, 2008 at 3:12 pm
Lana rocks! She gets my vote!
December 30, 2008 at 3:24 pm
My vote is for Lana!! She is a wonderful mother of two who works really hard and deserves something nice!
December 30, 2008 at 3:29 pm
Marie, thank you for your comments. However, I think you’re confusing some issues.
1) Yes, RRSP is meant to be for retirement, so taking it out for the HBP does mean giving up tax free growth on it. However, there are other tax advantages, namely lowering your taxable income that using the HBP doesn’t kill. Plus you can only withdraw a max of $20K which shouldn’t jeopardize your retirement (if it does, you were already in trouble).
2) The penalties if you can’t pay it back are minimal. All that would happen is the amount that’s withdrawn is divided by 17 years, and then that amount is added to your taxable income. (Note, I can’t remember if it’s 15, 16, or 17 years exactly but it’s something like that). That said, if you can’t afford the home you can’t afford the home, but that’s a universal truth regardless of HBP’s existence.
3) True rrsp contributions are sheltered from creditors. However, that’s true whether you go through the HBP or not so I don’t get your point. If I save up and put the money in a saving account, and must declare bankruptcy, I’m still in trouble. The question isn’t whether long-term investing in an RRSP is a good idea, it’s is it better to use the hbp or a savings account. In fact, if you are saving up for a house and worried about bankruptcy, it’s actually better to put your house savings in the RRSP according to your logic.
4) RE: “If you knew you wanted to buy a home, that is a pre-planned expense so why weren’t you saving for that?”. What I’m saying is using the RRSP AS the savings vehicle.
Your last comment Marie actually shocked me. You write “I left a bank whose advisor insisted that I put my RRSP contribution into a lower paying interest GIC so it would be cashable for a down for a home. My RRSP money is for my retirement, not for a downpayment!”.
What I don’t get is you’d still be contributing X money (let’s say $500 a month) for your downpayment + Y money (let’s say $1000) for your retirement. So your advisor was saying put $1500 into the RRSP of which you will withdraw $500 for each month you contributed it through the HBP. Get tax benefits, don’t pay taxes on interest, don’t risk anything because the RRSP was guaranteed.
But you didn’t like that, and instead kept contributing $1000 into your RRSP, and putting $500 in a regular savings account per month, on which you pay taxes on interest at the highest taxation rate, and forfeit tax benefits.
I don’t understand what your advisor was telling you that was so bad? Was it the interest rate was lower than a regular interest rate? But did you take into account the extra taxes you’d have to pay on the non-rrsp gic? I wonder if that would make the difference neglible. (this is before a TFSA, but next year that’s only 5K anyway).
December 30, 2008 at 3:29 pm
My vote is for Lana!
December 30, 2008 at 3:31 pm
I vote for Dinah!
December 30, 2008 at 3:32 pm
Voting for my Wife – Dinah.
December 30, 2008 at 3:35 pm
My vote is for Lana!!
December 30, 2008 at 3:37 pm
Voting for Dinah!!!
December 30, 2008 at 3:43 pm
I vote for Angela W and the Purple Squirrel.
If the squirrel gets enough votes it can win!
Graham
December 30, 2008 at 3:48 pm
I vote for Lana!!!
December 30, 2008 at 3:50 pm
My vote is for Lana! Miss ya lady!
December 30, 2008 at 3:55 pm
I vote for Dinah!
December 30, 2008 at 3:58 pm
Dinah all the way… she sings your praises aaaall of the time!
December 30, 2008 at 4:17 pm
What I’d like to see more of …. more case studies! They’ve been super helpful. Plus they’re fun – like a five minute mystery, or the choose-your-own-adventure books I read as a kid.
I’d also like to see more practical advice, like on how to teach kids about money, about how to generate more income and tips on negioating both new and old credit. (no recipies, except maybe your own that always sound so yummy when you mention them, please! I’ve got lots on other sites)
Can I vote for myself 20 times? My husband and I talk about your site to anyone and everyone, plus I’ve done a guest blog and a success story.
If I can’t vote for myself 20 times, I’m voting for my mom 20 times. This year for Christmas, she made my brother and sister each their own personalized budget binder with tons of your info and suggestions! She worked long and hard on them; I’d love for her to win an actual Gail planner.
December 30, 2008 at 4:19 pm
Another vote for Dinah.
December 30, 2008 at 4:39 pm
I vote for Lana!
December 30, 2008 at 5:08 pm
Another vote for Dinah!
December 30, 2008 at 5:14 pm
I vote for Lana!!!!!!!!!!!
December 30, 2008 at 5:17 pm
Voting for LANA!!
December 30, 2008 at 5:30 pm
I may wind up being a dissenter here, but I’m not actually so keen on the case studies. I think that they’re great once in a while, but they can get really repetitive- spending was out of control/they didn’t think through the consequences of their spending (school)/they didn’t have an emergency fund- solution: get a clear idea of spending, spend less, make more, pay off the highest interest rate first, stick to it, don’t make the same mistakes next time.
Like the above commenter though, I’d like to see practical advice on here (like you’ve always had!). How to talk to your family about money. How to generate mor eincome. Financial things to think about when major life changes come around- births, deaths, moves, etc. How to choose between differnet types of insurance (like in this post). Things to consider when making the tough financial choices.
December 30, 2008 at 5:30 pm
I love your show! My vote goes to Dinah.
December 30, 2008 at 5:31 pm
I’m voting for Lana!
December 30, 2008 at 5:33 pm
My vote goes to Angela W!
December 30, 2008 at 5:36 pm
Another vote for Dinah!
December 30, 2008 at 5:41 pm
My vote is for Angela W. Good luck Angela!
December 30, 2008 at 5:47 pm
What I’d like to know more about…how to prioritize debts and how to deal with collection agencies.
December 30, 2008 at 5:53 pm
My vote is for Lana!
December 30, 2008 at 6:02 pm
I vote for Dinah!
December 30, 2008 at 6:03 pm
I’m voting for Lana!!!
December 30, 2008 at 6:08 pm
I vote for Lana!
December 30, 2008 at 6:10 pm
Dinah! Dinah! Dinah!!!
December 30, 2008 at 6:48 pm
I vote for DINAH!!!!
December 30, 2008 at 6:49 pm
I also vote for Dinah.
December 30, 2008 at 6:53 pm
My vote’s for Lana
December 30, 2008 at 7:13 pm
My vote is for Lana
December 30, 2008 at 7:16 pm
I vote for Dinah!
I had not heard of you before Dinah mentioned (and mentioned and mentioned!) your show and website. Since then, I have watched a couple of your shows which are very educational.
December 30, 2008 at 7:18 pm
I vote for Angela W
December 30, 2008 at 7:34 pm
I vote for Lana
December 30, 2008 at 7:41 pm
Angela W gets my vote
December 30, 2008 at 7:45 pm
I vote for Angela W.
December 30, 2008 at 7:48 pm
I vote for Lana!
December 30, 2008 at 8:00 pm
My vote is for Lana!
December 30, 2008 at 8:14 pm
My vote is for Lana!!!
December 30, 2008 at 8:42 pm
I vote for Angela Wade