This & That: Figuring It Out Edition
Posted by Gail | Filed under This & That
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.