This & That: Family Matters Edition
Posted by Gail | Filed under Money & Family, This & That
A Wrote: My father passed away about a year and a half ago and I have since found out that I will be inheriting 1 million dollars.
My husband and I have been discussing how to go about making this work best for us and our future children. I am employed as a registered nurse and my husband is a teacher. Our gross income this last year was $110,000 dollars.
We have been very lucky as we currently have no debt, and are living in a condo rent free that my parents had purchased as an investment to rent out to future renters.
We have been thinking about the type of home we can afford to buy using my father’s gift. What kind of advice can you offer us in order to make the most of this opportunity? We are looking for a smart, long term plan as we are both 25 yrs old and have many things to save for.
We are interested in hearing what your thoughts are.
Gail Says: I’m sorry for the loss of your dad and hope you are in a good place now that some time has passed. You clearly make a good income, so my first warning is to not let lifestyle inflation blow your good sense up. To buy a home that works for you, keep in mind that you want something that meets all your needs, and some of you wants, but doesn’t eat up your whole inheritance. Keep in mind that by putting your inheritance into your matrimonial home, you husband will be entitled to split it should your relationship flounder. That being said, I imagine you’re both very excited about getting into a home of your own.
First, figure out what you think you can manage by way of monthly expenses for a home: property taxes, insurance, maintenance (don’t skimp), utilities. This should not be more than 35% of your net income, though with no mortgage I hardly imagine it would be even close to that. Add all the rest of your expenses. Stick 1 year’s worth of those expenses in a high interest (I know rates are low, but you want to keep it liquid) savings account for emergencies. That’s your emergency fund.
Now decide what you want to do with the rest of the money. How much house do you want to buy? Do you want to set aside a fund that will allow you to travel? Are you planning to have children? If so, why not set aside some money now for your mat leaves so you don’t end up having to scrimp when you’re off with babies? Then look at houses.
Hope that helps. Let me know how it all turns out.
D Wrote: My children, aged 11 and 9, have started asking me about whether we have a lot of debt, whether we have a mortgage (we do) and how much our house cost. I was concerned that they were worried about it, so I explained that we managed our money so that we could always make our payments. I then explained the concept of a mortgage. I think I missed a real chance to do a better job of talking to them about money. What do you suggest on talking to kids who raise these kinds of questions?
Gail Says: I don’t think you missed the chance at all. You reassured them, told them about how you prioritize your responsibilities and then gave them new info (on the mortgage) to walk away with. I think you did a great job. You’re not done. Clearly your kids are interested and smart enough to ask good questions. I suggest you keep talking about how you manage your money and what they can expect from life as they grow up.
S Wrote: My family situation is a little unusual and I need some advice on where to focus my financial attention. I am a 45-yr old woman with a PhD and a great public sector job with a good pension, my husband is 70 and retired with a good pension and we have a 9 year old daughter. We have two mortgages (house and cottage) that total $260,000 (paying it down at accelerated rate), we have maxed our TFSAs, contribute $2500/yr to RESP and I have no unused room in my RRSP (investments doing moderately well). No other debts. Question: Should we focus on paying down our mortgages while we have two incomes coming in or should we be adding to our savings? I am confident I am always going to have a well-paying job, even when I am on my own. By the way, we really enjoy our life and don’t feel financially stressed at all. We just want to make some smart decisions. Thanks!
Gail Says: M first question is this: Does your husband have sufficient life insurance so that when he dies the mortgages will be paid off? If not, then you need to get at least one of those puppies gone. If he does, then you should be focusing on building up your long-term savings, since the insurance will take care of the mortgages should you become a one-income family. BTW, congrats on having your game together.
M Wrote: I have been addicted to your shows and respect you tremendously. You offer easy-to-understand advice to the average person regarding financial matters. I am a literacy worker and have used your recent book from the Good Reads collection to educate adults on basic financial literacy. I hope you can answer my question.
My parents are what you might call, ‘penny wise, pound foolish’ people. All their life, they have worked hard for their money, budgeted well and saved enough so we wouldn’t live paycheque to paycheque. They earn below average earnings and live within its means. No lavish spending or fancy trips.
Three years ago, my dad’s friend at work told him about an investment broker who was promoting a leverage ‘scheme’ which would guarantee my parents a payout or dividend, bringing in extra income allowing my parents more financial freedom. Of course, we didn’t have the money to invest so the broker ‘encouraged’ my dad to borrow $100k to invest into the leverage scheme. My parents were assured that borrowing money would not affect their credit and that the stock prices would only fluctuate somewhat but not drop tremendously. Someone like my dad, who didn’t know much about investments or stocks, clearly fell for it, especially since his so called friend at work also signed up for this type of investment. Not a wise move.
Right after the market crash of 2008/2009, we discovered that the independent broker who approved my parents’ applications had fled to Pakistan. He had been charged for fraud, and that he approved several hundred leverage applications based on fraudulent numbers and inauthentic tax return slips and income statements. Based on my parent’s below average income, they would have never qualified for this investment in the first place.
So my parents have been paying a major interest payment (they each have a leverage account) from their pockets every month for the last two years which is putting them in a hole. The stock portfolio has dropped to a 2 star rating for a 3 star rating and the stock is 50% down.
They will be retiring in 5 yrs. Should they sell the stocks and cut some major losses now before it’s too late or ride out the market for another 4 yrs (it’s a 7 yr term), hoping to see an increase in value of our portfolio?
Gail Says: I’m very sorry that your parents have been through this. They can either sell the investments and take the loss, using the proceeds to pay off as much of the loan as they can, and then pay the rest from cash flow, or keep paying the interest on the loan and hope the portfolio recovers. At this point they should probably have a professional look at what they’re holding to see if there is hope. I can’t tell from where I’m sitting. This is a perfect example of leverage going bad, and I’m sorry it has happened to your folks.
C Wrote: You have been a tremendous influence on our household. My wife and I married 4 years ago and assembled a combined debt of +$40,000. After spinning our wheels the first year of our married lives, and not having much money to spend or save we came across your show one night while flipping through the channels. It was life altering. Within 2 years of watching our first ‘Til Debt Do Us Part’ show, we are now debt free, have a wonderful baby and have managed to save enough for a down payment on a new home which we will be moving into at the start of 2012. That’s our story and here is our question: We are debt free now, but do live in a tremendously expensive city – Vancouver. Our new home is almost completed and we are now looking ahead to the future. This means creating 2, 5 and 10 year financial goals, but we are a little stuck on how to successfully set goals for the future. Our plans include a new vehicle, a 2nd child, possibly a larger home, and of course retirement. Do you have any recommendations on how to set up realistic and therefore successful 2, 5, and 10 financial savings goals?
Gail Says: As far as the timelines go, it is only relevant that you have those dates … very specific, not 2-year goals, but by June 2013… As for how to set goals, I have an entire process outlined in Debt-Free Forever, beginning with figuring out what’s really, really important to you. In short-form here:
Your goals should be so obviously clear that any Tom, Dick or Harriette could look at what you’re trying to achieve and be able to measure your success. After all, if you don’t know exactly where it is you’re going, how will you know when you get there? To be a SMART goal, it has to be:
Specific – You are much more likely to accomplish a specific goal than a general goal. A general goal would be, “Pay off my debt.” A specific goal would be, “I want to be debt free so I will pay off my debt, repaying my most expensive debt first, and having all my consumer debt paid off in three years or less.”
Measurable – Establishing concrete criteria for measuring your progress will help you to stay on track, reach your target dates, and experience the exhilaration of achievement that spurs you on to continued effort required to reach your goal. To determine if your goal is measurable, ask: How will I know when it is accomplished?
Attainable – If the goal is too big, frustration will get in the way. Planning to have a million dollars in savings when you make $10 an hour may be unattainable?
Realistic – You must be both willing and able to achieve the goal. You are the only one who can decide just how high your goal should be. Your goal is probably realistic if you truly believe that it can be accomplished.
Timely – A goal must be grounded within a time frame. With no time frame, there’s no sense of urgency. If you want to save $1,000 for an emergency, when do you want to lose it by? “Someday” won’t work. But if you anchor it within a timeframe, “by August 1st”, then you’ve set parameters within which you’re working.
May 10, 2012 at 7:14 am
Thanks for the SMART goal reminder!
May 10, 2012 at 7:25 am
Good advice , as always.
I think A needs to do more to protect at least a major part of her inheritance. As Gail reminds her, putting the money into a matrimonial home means her husband is entitled to half the value if the marriage doesn’t last and this is a real possibility that must be faced. A’s husband is already benefiting from housing provided by her side of the family. There must be some way to keep the inheritance from being considered a joint asset in the event of divorce proceedings. Does anyone know how this can be done?
May 10, 2012 at 8:04 am
Why is A in a hurry to buy now? If she and her husband can afford to pay cash for a home, why not wait until prices come down? Owning a home is more than just an investment of money — it’s all about time and effort too. Do they want to continue to enjoy more free time? Do they want to travel? If so, then a condo lifestyle might be good for a while longer.
Just my two cents
May 10, 2012 at 8:59 am
Gail, I have just decided to get an education in finances so I joined Primerica. It has given me an insite to what I didn’t do to plan for my future but….Im 56 and recently became single. Didn’t plan for being this old! What is your best advice to older women in my place? What would u recomend to help us not to have to work till we are 100!
May 10, 2012 at 9:27 am
@Kathleen: Please Google Primerica… it’s not a scam per se, but the numbers that they provide can be very misleading (quoting ‘top earners’ rather than average earnings, etc). And the ‘tree’ structure of their advisors resembles a pyramid scheme.
May 10, 2012 at 9:39 am
Kathleen, I second Jay. I know a couple of people who have “converted” to Primerica. They didn’t make any money from it, despite working hard. In fact, the effort and time that went into Primerica distracted from their primary jobs, family, friends…. They ended up poorer as a result.
May 10, 2012 at 9:56 am
@D this is a bit of a plug for Gail, but she has an amazing book called “Money $mart Kids”. Its a quick and easy read and covers educating your kids about money just about from birth.
My kids are several years older than yours, at 16+17 and are fantastic with their money, and many of the things in the book I have done for years. However, there are tons of tips I wish I had known then. I explained to them years ago the Perils of Credit cards, the ins and outs of Mortgages and the difference between Gross income and Net income, so they were familiar with the terminology and the concepts( I’m a realtor, so its often dinner table conversation)
After reading her book, one of the first things I did was “talk Money” with my kids and let then know details about our complete financial picture; Mortgage, debts, cost of running a house etc. It was a difficult conversation (money was a Taboo subject for me growing up) but I think it really opened their eyes to the Real World, and quite frankly gave them a whole new understanding and appreciation for what we do to keep a roof over our heads. I think kids knowing the financial situation really helps them feel more secure (even if you are in financial trouble) because they have something solid to deal with, rather than the mystery of why is everyone on edge.
Pick up a copy of the book “Money $mart Kids”, its probably one of the best investments you can make in your kids futures.
May 10, 2012 at 12:22 pm
@Kathleen I third everyone’s cautions with Primerica. They are not a reputable financial services company and they are not the place the get a proper education in finances.
Very few of their agents have any kind of background in financial planning and are hired on their sales abilities only.
If you want to learn more about finances Gails books, as well as David Chilton’s Wealthy Barber series are the best place to get a basic education in finances and will teach you everything you need to know to get ahead. No schemes, no gimmics, the straight knowledge.
May 10, 2012 at 1:41 pm
@Kathleen I forth everyone’s opinion. I use to be a financial advisor with a bank and primerica is a terrible company. I have recently been asked by old long term friends via Facebook to sit down with them and go over my investments. Without being rude, these people are not the type to know what to recommend. I know their financial lives have always been a disaster. Primerica has been the one to teach them everything they know so I will stay very far away. If you truly want to get I to finance look up the course recognized by banks ect. They are not expensive. All the best