This & That: Figuring It Out Edition

A Wrote:  I am 23 years old and am done with my schooling. Unfortunately we were not advised to take all the extra out while we could. I am now in the process of trying to figure out what to do with that money that is just sitting there. I believe there is approximately $10,000 left of ‘my share’ as it is part of a family plan. I was advised to take the money out through my sister and pay her the difference in her tax return. However it would affect her government childcare rebates and she is not willing to do so.  I would like to transfer my $10,000 into RRSPs, or some other sort of savings plan.  Do you have any advice as to how to proceed?  Thank you.  P.S. I am not sure what portion of the $10K is grant money.

Gail says:  The first thing you have to find out is how much is grant money, how much is investment income and how much is original contribution money. Your RESP provider should have paid the income and grants out to you first, before touching the principal invested. Assuming there is just principal left, you can take that out at any time without tax consequence since there was no tax benefit when the money went into the plan.

S Wrote:  We have $35,000 in consumer debt mostly at interest rates of 5.99%. We have paid off over $11,000 in our first year using your 3 year debt repayment plan. My husbands work gives stock out to his level employees every year for the last 3 years and some has just begun to divest. We now have around $20,000 in this stock but only have access to $4,000 or so right now. He will continue to get stock each year in the future. Should we sell this stock or keep it as an emergency fund. We used up our e-fund during my maternity leave last year. My uncle told me we could use the stock as collateral for a low interest loan but our credit union acted like I was crazy when I suggest it. Right now our debt repayment is $1465 a month/25.87% which it very hard for us to stick to our budget with diapers and formula etc… We were hoping for a big bonus for my husband this year to help with the debt but that hasn’t happened. What do you think Gail?

Gail says:  Your stock option cannot be your emergency fund because it’s in a less than 100% secure investment. If you want to free up your cash flow then selling the stock and paying down the debt makes sense as long as it doesn’t screw with your taxes. You need to check with a tax specialist to determine the tax implications of cashing out the employee stock options. Because I don’t know where your hubby works, I don’t know if this is stock that qualifies as an RRSP or TFSA contribution, so ask a specialist and see if you could make a “specie or in-kind contribution” to deal with the tax issue. Then you could use the stock as your “retirement savings” and use your cash to pay down your debt.

J Wrote:  Love your no BS approach. We have been living on a strict cash budget for the past few years and besides the car and mortgage we are debt free. We want to start a family however I keep putting it off as I am obsessed with having 6 months of my husband’s income saved in an emergency fund before having a baby. My husband is self employed in the housing industry and I worry a lot about him losing work. Do you suggest waiting until we have saved the 6 months or am I being too strict?

Gail Says:  A healthy emergency fund is six months’ worth of essential expenses. If you’re planning on having a baby, you may need more depending on how long you plan to stay home with baby. You’re in a good position because you are consumer-debt free. Why not figure out what your “mat leave” budget will be and practice living on that for a few months, socking away what you’re not spending into a) your emergency fund, and then once that’s solid b) your baby fund.

L Wrote:  I’m 23 years old, and I am hope you can answer a few basic questions so that I can plan my finances well. I have just officially paid off my student debt (both a student loan and credit card debt racked up during that time). I work freelance, which puts me in a position where I have to be a little extra careful with my finances because I have less job security than others. So far, I am consistently able to save 20 to 30% of my monthly paycheck after expenses (both the essentials and the extras). I have two questions:

1) The obvious savings goal that comes up often is retirement, but at my age there are other expenses, particularly home ownership, that will pop up first. Also, since I am self-employed, I need to be more careful to have an accessible “emergency” fund, or some savings that are fluid. So, what should I be doing with my savings? TFSA? RSP? Mutual funds, GICS… I don’t understand what options are right for me.

2) As of right now, the only credit I have is in the form of cards. Is there anything beyond just paying my bills on time to improve my credit score? Is getting a line of credit through my banking any different than a credit card?

Gail says:  Well done on being so sensible and so conscientious. Your second question first: there’s no diff… just keep doing what you’re doing.

Now on to your first question: Yes, you have many goals and how you divide your savings is totally dependent on what you’re trying to achieve. You’re right when you say you need a healthy emergency fund: six months’ worth of essential expenses. The division of the rest of your savings between home ownership and the long-term future is a question most people your age face. Seeing retirement as a looooooong way away, makes it easy for some people to put it off. But the longer you put it off, the more you’ll have to save because you’ll have robbed yourself of time and the magic of compounding return. At your age, you need only put 6% away for retirement consistently.

Okay, if it were my money, here’s what I’d do. Assuming I have 20% to save, I’d put the first 6% in an RRSP. If my marginal tax rate isn’t that high right now, I wouldn’t claim the deduction. I’d hold on to it until saving on taxes became more of an option, at which point I’d start claiming those unused deductions. I’d use the remaining 14% to build my emergency fund. Remember, you need six months’ worth of essential expenses: rent, basic food, and car payment, whatever you HAVE to cover every month to stay even. Once that was done, I’d use that 14% to save for my home downpayment.

24 Responses to “This & That: Figuring It Out Edition”

  1. Great advice as always Gail.

  2. I think we should revise the definition of “emergency fund” to mean 6 months of essential expenses x2. I don’t mean 12 months, I mean 6 months + catastrophes. The transmission goes, you need a drug not covered by your plan, somebody dies.

  3. I can’t imagine how low the birth rate in Canada would plummet if everyone waited until after they were consumer debt free with 6 months of income (not essential expenses) set aside before they started their families. Heck even essential expenses. How negative could that number go?! I certainly wouldn’t have been born and neither would any of my friends.

  4. I think it’s important to be consumer debt free and have a substantial emergency fund before starting a family. Maternity benefits don’t go far and you end up with more debt before going back to work full time. Another good plan, besides practising living on the mat leave budget, is to live on one salary and bank the other for at least a year before starting a family. If you are carrying consumer debt adding the expenses related to a new baby (reduced earnings, baby costs) just doesn’t seem wise or responsible.

  5. I think there are many factors that need to be considered in addition to finances when deciding to have a baby – age, career, etc. A person with government mat leave benefits for example, shouldn’t be as worried about making sure they are debt-free before having a baby. That woman will have nearly her full salary and budgeting can continue in almost the same fashion as before.

    In addition, women need to be careful about their age. It’s no use being consumer debt free with 6 months of emergency expenses, only to find out after all that time and hard work that you’re too old to have a baby. The technological advances in the fertility area give people the impression that babies can be a “guarantee” one way or another. This is not true, unfortunately.

  6. There are plenty of people who might not have massive savings accounts but are careful to live within their means. I am constantly surprised by what some people think is ‘necessary’ when you have a child. I live in an area where people tend to have larger families (up to 13 or so!) and aren’t all that well off…and the kids are healthy and happy. They don’t go to camp, they’re not on sports teams (other than school-based ones), they don’t go out for dinner or order in, they don’t eat a lot of meat, they don’t go on vacations that involve a lot of travel, they drive old vehicles…but they eat healthy food that has been grown in their backyards, and pork and chicken raised by the neighbours. They play outdoors and aren’t stuck in front of a screen. They don’t have to worry about wearing the ‘cool’ clothes because nobody else can afford them either. The babies wear whatever’s left over from the previous babies. Their parents and older siblings carry them instead of popping them in the latest designer stroller.

    I’m not saying things are perfect, but the idea that a child is a massive burden because of all the things you just have to buy…well, I think that’s a little misguided.

  7. @tight Maybe a low birth rate isn’t such a bad thing! New parents are one of the groups most heavily and unfairly targeted by advertising. There’s a lot of “Do you love your child? Then buy X” in the world, and you’re already too stressed and sleep-deprived to make sound decisions and critically think about the messages you’re hearing.

    If you already have consumer debt, increasing its size for baby expenses doesn’t sound the alarm bells that it should.

  8. AS always really good advice Gail. I love your show. It has really taught me a lot about finances.

  9. Just to clarify – I certainly agree that Gail’s advice is the most responsible way to go. No question.

    I’m just a little amused by the idea of it when I apply it to my childhood. Everyone had a mortgage and probably a car loan. Credit cards were only just being implemented so apart from those two things, there just wasn’t much other debt. We didn’t have name brand anything because there really weren’t any labels to covet. And everyone we knew lived more or less paycheque to paycheque. Of course, I grew up in the ’70’s, and the consumer world was a much different place then.

    And I’m one of those people who did the responsible thing and left it too late. Great net worth, no kids. Life, eh?

  10. I agree with SB regarding starting a family. There’s is more factors to consider. YES being mindful about finances, however sometimes our timing isn’t our bodies timing. And if we’re waiting for the perfect timing/situation, we may be waiting for a long time and it may never happen.

    I think doing your research while one is pregnant can make things really work to one’s advantage. Whether it’s talking to experienced moms, reading reviews etc. Babies don’t HAVE to be necessarily expensive…most things go on sale, purchase cloth diapers (we’ve saved thousands of dollars this way), nurse (if possible), make your own baby food, attend Early Year Centres (free and fun), shop at consignment/thrift stores. I’ve seen people overdo it with babies…high end strollers, latest and greatest fashion, fancy toys, new mini vans, the fancy phones. Babies don’t need much…the marketing people just tell us we do…..

    In the end I think it’s far more important to have a solid and healthy/relationship with your partner.

  11. The EF is a must for everyone, including new parents, because you don’t know that you will be able to go back to work. Some kids require more of your time resources than EI allows. Kids get sick and need attention. If you are used to living off of two paycheques, reality can be hard.
    I wish that the EF would be taught before people leave home. That way one would save the money they earn while living at home (instead of overdoing the fun spending) and would have the EF ready before leaving the nest. Question to Gail: Do you include that in your ‘kids-oriented books’?

    Sorry that you are childless and regret it. The point is not about waiting until everything is perfect (few if any have a perfect life), but the point is about putting everything in place and making the choices now so that your dreams might happen without extra nightmares. So if you are in a rush to have a baby (before menaupose), spend even less so you can save even more and you won’t have to wait forever to get that child.

    If the transmission goes outside the warranty period, that money comes out of your car maintenance fund, not your EF. Cars break down and that is expected. Start that fund before the warranty expires.
    The EF is for illness and job loss. Other stuff is pre-planned spending… that we would rather spend elsewhere… I know…

  12. Great blog, true having a baby does cost money but do we really need all the gear and labels (no). Labels and high end gear is target to those who live in larger cities and those who have money. I make a pretty good living and I am able to raise two kids. I buy what is on sale and purchase in larger sizes for upcoming months/yr. Mat leave was tough but you manage with what you have. Cut back on your cell phone, cable or take outs in order to fit your means. Once you are home with your child what is really needed, do you really need the new I Phone or the tablet?……..wearing old joggers and t-shirt was one of my best parts of staying home with my child, didn’t have to dress up and wonder if what I have is good enough…..Having a child is one of the best things you can do in your life…..every monent with baby is worth it.

  13. I have to agree with the previous posters – children are NOT that expensive and definitely not a burden. I have four, 2 of my own and 2 adopted, and we had a great time while they were growing up, even though I was a single parent for 10 of those years (my ex was an alcoholic). I nursed both my boys and only needed formula for the 2 I adopted. I used cloth diapers for all 4. I specificially asked for them at my first baby shower and continued to use them for all 4, so no diaper costs. I made all my own baby food and their clothing was all either gifts, hand-me-downs or from thrift stores. We went to the library and did crafts, went for walks, to the swimming pool, etc. I even managed to save enough each year by using coupons, points, etc. to take the kids on a 2 week summer holiday. My kids were never too expensive or a burden, they were the joy of my life and they still are.

  14. From a financial perspective, the proper time to start having kids is about age 65.

  15. LOL@InsureCan…it certainly looks that way for me! I’m 32, hubby is 35. We have some consumer debt that will take about 3 years to pay off. That puts me at 35 and hubby at 38. Fertility issues mean about 15K to 20K to conceive….not sure how long it would take us to save that once we eliminated our consumer debt, but I’m thinking my child-bearing days will be far behind me at that point…..So I guess we don’t have a child. Besides my biological clock, there is also the fact that my husband has CF and may not live into his golden years. Hard choice to make–have a family while we are still relatively young even though there is debt (and add more debt) or go childless and regret it when we are old and finally have money. It’s easy to say that you should be financially set before having kids when you can have kids the normal way. It’s just not that simple for us.

  16. It’s not necessarily about being financially “set” before having kids but more about a financial plan…can you live on one income and mat leave $…or even just one income…does one of you want to stay home part time/full time??…are you prepared if your child has a disabiltiy that will require alot of time and money…(the later is what happened to us and thankfully we were prepared…the first time.)..when the second child came along and he too has a disability that was more of a challenge…then when my husband became so ill that he could no longer work at age 45 (4 yrs ago) that’s when the caca hit the fan….it would have been worse if we didn’t have a little sumthin’ sumthin’ saved as Gail would say…lol…but there were still alot about our “plan” that could have been much much better….so if you want the kiddies (and no matter how tough mine can be I would trade them for anything!!!) just be sure you have a good plan in place…it may not be perfect…but it should be something:)

  17. oooppsss….the above should say (no matter how tough mine can be I would NOT trade them for anything)….wonder what Freud would say…LOL…

  18. I agree with most people here. It is essential to have a healthy emergency fund before having a baby and it is also a good idea to live on one salary for a while and see how it works and how you have to adjust the budget. The credit cards and any LOC should be paid off too before even thinking about going on mat leave. As many have said, there is no need for spending all kinds of money on all the fancy gadgets and toys that are advertised and the baby won’t know the difference between designer labels and consignment or thrift shop items. Borrow, trade and share – it works and also reduces the clutter.

  19. At Flynnycat
    I am now 39 with a 3-1/2 year and hoping to have one more, we don’t have many relatives and would like our son to have a sibling. In my early 30’s I had a health scare, (cancer), and also lived through a leaky condo, costing us 80 grand. We aren’t rich, but are lucky to make decent money, and have been frugal throughout the years…..I’m a bit of a worrier, I think it’s heredity. Anyways, I think I can relate to your predicament, it’s tough to decide……However my son is the best thing since sliced bread, he makes me laugh everyday, and brings joy to my heart. Only you and your husband can figure out what’s right for you, but know it’s not a lost cause and things have a way of working out. Good luck!

  20. Gail makes it clear in many of her posts the key is balance. If you can be debt free with 6 months of essential expense money saved in the bank before having a baby, terrific. If not, as long as you can make it work in a way that works for your family, terrific.

  21. Just my two cents but I would like to mention that for those who are willing to wait, but then realize that the time has passed for a biological kid, it is possible to also adopt. There are a lot of kids out there needing a family and love who are in an unfortunate circumstance.

    From a financial side, having a emergency fund is absolutely necessary. Personally, although my family is a two income family, we have structured our finances such that if either one of us loses a job, we can pretty much sustain on one income after removing all extraneous activities. My general position on funding is that I would rather be looking at it then looking for it (words of wisdom from a good teacher).

  22. at cw: 🙂 Thank you. I think both of us feel that having one child would be worth it. My husband would make an amazing father, and I’d love to see that, whether with a biological child or an adopted one.

    at C H: the cost of adopting a child is almost as much as fertility assistance. We’ve talked about adopting and it may be the way we go, if we “go” at all 🙂

  23. @Flynncat Just so you know, the cost of adoption varies quite a bit. For domestic adoption through the CAS the cost can be virtually nil since they would provide the Pride training and the homestudy. Alternatively if you’re looking at an international adoption, it can range from 15K to 50K.

    I hope you and your husband figure out what you need. Best Wishes.

  24. I’m with InsureCan. I don’t think that the decision of when to have a child is strictly speaking financial! I like how Dave Ramsey always tells his callers that their coming baby is a blessing, no matter how dire their straits.

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