This & That: Mish Mash Edition
Posted by Gail | Filed under This & That
R Wrote: I am a young recent graduate of University with a fair amount of debt to OSAP. My family has always been money dumb and so I have made it a personal goal to get money smart! I have read through your site, books and watched your shows religiously and I think I’m doing pretty well so far. I have put away an emergency fund in a Tax Free Savings Account and opened a low risk Mutual Fund that I contribute a small amount to monthly. Lastly I have opened an RSP account, which I’m pretty proud of considering I’m 23! On your site you mention interest rates of 9%, but I found out that my interest rate is only 0.04!!! My bank says that is the best they can offer unless I lock in a 2 year GIC which would bring my interest rate up to 1.5! Where and how can I get better rates!!!!???? Thanks so much for taking the time to read this over.
Gail Says: My site doesn’t refer to an “interest rate” of 9%, but does make reference to a “return” of 9%… interest rates fluctuate, as do other types of return, sometimes paying more and sometimes paying less. You won’t get 9% without taking a lot of risk right now. But you also don’t have to settle for the horrible returns most big banks offer. Go check out ING direct, where you’ll find a high interest savings account with a 1.5% rate. Other non-traditional banks are paying even more… as much as 2%, without you having to lock up your money at all.
K Wrote: I tend to worry that I’ll over contribute to my RRSP’s in a year and end up getting penalized at tax time. Would it be better to stash the money in a savings account and then make a lump sum payment at tax time? Or is there a formula for calculating how much you can contribute based on income?
Gail Says: Your RRSP contribution room is equal to 18% of the prior year’s earned income or the dollar maximum ($22,450 for 2011) whichever is less; minus your pension adjustment for a contribution to a company pension plan. If you want to make sure you’re not going over the limit, take your last year’s income and multiply by 18, then divide by 100. So if your income was $46,000, your calculation would be 46,000 x 18 ÷ 100 = $8,280 or $690 a month. Also keep in mind that you have up to a $2,000 over contribution limit that will help you avoid penalties.
C Wrote: About 3 years ago, I helped my husband to pay off all the debts that he had accumulated. It took 4 years to pay it off. Once it was all paid, I went to purchase a car that was greatly needed. I was so excited about getting a car that worked that I am afraid that I signed a contract without reading it. I have since been told that because of the bad credit rating they were only able to get a finance company with high interest rates to take me on. Is there anything that I can do to have the contract rewritten at a lower interest rate now that I have my finances in better shape?
Gail Says: In all likelihood, having gotten you on the hook they won’t want to let you off. But if the loan is fully repayable at any time, you could go and get financing from your bank to pay off the car financing, lower your interest rate. Read your contract to see if you can pay off the balance in full at any time without penalty. Then go talk to your bank about getting a lower-cost form of credit that you can use to pay off the loan. Do NOT reduce the monthly payment amount. You’ve worked that into your cash flow… use it to get to debt-free faster.
C Wrote: My husband and I have always been very responsible spenders. Paid off our mortgage early, pay off our credit cards each month, we usually don’t make a major purchase without having money to cover it. Our combined income is around $55K I have been sitting on very poor performing mutual funds (MutualLife Advantage Fund) for about 18 years. I only have $3000 tied up… though they are probably only worth $2000 now… small potatoes but they’re my potatoes… I’m thinking of going to the bank, cutting my losses selling them and buying silver bars. I really don’t know what I’m doing…but I just feel like this little nest egg is being scrambled and slowly eaten up…What do you think?
Gail Says: I’m sorry you’re so frustrated. I think lots of people buy investments without understanding the risks associated. I think you don’t really want to buy silver bars. With the low interest rates of the past decade, people have launched themselves into investments they haven’t understood. And while the markets were doing well, they could convince themselves they were doing the right thing. The test always comes when the markets do badly. If you’re unwilling to lose money, you don’t belong in the equities market. Buy yourself bonds which will mature at the value you’re quoted, or stick with the tried and true GIC. Returns will be lower but you’ll know exactly were you stand.
M Wrote: I had a question about credit cards that I have not been able to get a clear answer to and would really value your thoughts on this issue. I currently have one low interest line of credit (never used, just for emergencies); as well a regular credit card that I use for all purchases and pay off in full each month (essentially to save debit fees). I have found another credit card with a different banking institution that would be much better for my everyday purchases as it offers some cash back incentives that would work in my favor. However, I am not sure what to do about getting another credit card that would replace the one I use for everyday purchases and pay off. Is this a bad idea from a credit rating standpoint? Would I cancel the other card that I would no longer be using (I have heard mixed opinions on that and that it can damage your credit rating, but n the flip side having too much open credit is a bad thing?
Gail Says: The best way to transition from one card to another is:
1. Get the new card you want first.
2. Then cut up but don’t cancel the older card.
3. Use the new card exclusively.
4. After six months, once your history is established on the new card, cancel the older card.
E Wrote: I have (a) simple question that I hope you can answer. I make 80K a year, which puts me at 39% marginal tax (in Ontario). I contribute minimally to my RRSP as I work in a secured government job; and have a great pension plan. (I contribute $200/month). I am eager to be debt free, and to reach this goal I have been cutting back and staying on a budget. I would like to earn another 1k/month to secure this dream in about 5 years. My question is 1. Would it be better to make this extra 1k/month at the same company (but more taxes will be taken off or 2. should I make that extra money else where; so less tax is deducted (but at the end of the year, do I end up owing tax??).
Gail Says: The tax man doesn’t care where you earned the money; just that he gets his share. So even if you take a second job elsewhere and less tax is taken at source, you’ll have to pay when you do your return.
K Wrote: I have a dilemma and realize you might be the only person whose opinion I trust. I purchased my current home at the peak of the real estate boom in Calgary in 2007. I had considerable equity that I put into the house, so that when it was all said and done, my mortgage was over $100K. Now in 2011, I have managed to pay down about $35K so my current balance is $65K. My mortgage is variable rate, currently at 3% so assuming status quo, I could have my house paid off completely in 6.5 years. Since purchasing the home, both my adult children have left the nest and I live alone. Even though the house is modest, I find it’s too large for me and how I live. The thought has crossed my mind on many occasions to sell and purchase something smaller and get completely out from under any mortgage payments. The money I’m currently putting towards the house would then go towards RRSPs. I am 50 years old and plan to continue working at least until I’m 60. The pro’s of this plan: maximizing RRSP contributions thereby realizing tax benefits of about $3500/year; and freeing up monthly cash flow by reducing operational costs (taxes, insurance, heating, etc.). The cons: selling the house for less than I paid for it and having to pay for Realtor fees and moving expenses. If I stay in this house, then I will have to defer any additional RRSP contributions until after the mortgage is paid. My thoughts are there is no guarantee the house will hold its value let alone increase in the next 6.5 years vs. RRSP’s which are guaranteed to earn some form of interest. Also, if interest rates increase, my repayment on the mortgage will be slowed down considerably as I will have less money to apply towards the principle. I have no other debt. Am I crazy to sell for less than I paid? Is it better to hang in there or get mortgage free? I’m sorry this is such a long question… I hope you can help.
Gail Says: Yours is the kind of question I love to get. You’ve clearly thought this through. Perhaps a few more questions will help you to clarify for yourself:
1. Have you actually figured out how much you’ll be out by selling now: loss on house, realtor fees, moving costs, etc.? You would have to make that much back on your savings to break even.
2. Have you considered taking in a roommate if you have more space than you need? Students are always looking for affordable housing. Perhaps you can find someone in a similar position (age-wise, and lifestyle wise) to you. Don’t just close the door on this, think about it. It could make all the difference in the world.
3. You’re 50, so RRSP contributions have less time to grow. The tax benefits are attractive, but I don’t know enough about your situation to say that a $3,500 tax refund now will work to your advantage later if you’re pulling money out at a high tax rate.
4. While there are no guarantees on the house’s value, and an increase in rates will slow down your payoff, you have time. You’re only 50. If you retire at the normal retirement age of 65, you actually have 15 years. At that point you could sell and downsize, using the extra money to fund retirement.
I’m a big proponent of not putting all your eggs in one basket… and I prize savings… but it seems silly to realize the loss on your biggest investment just because you’re a little afraid right now. Think this through logically. Work out the numbers. Look at all the options. Then make your decision.
July 26, 2012 at 7:39 am
Re: the advice to C…these days with the economic times as they are it is rare for your bank to take on the debt of another lender unless your credit is stellar or you have some form of liquid or real estate security…if your credit rating was such that you had to go with a “B” lender in the first place it probably won’t be taken on by your bank…maybe a strong co-signor will help as well…go and talk to your bank about your personal circumstance and see what they have to say, at the very least you’ll get information that you can work with to improve things for the future
July 26, 2012 at 7:41 am
I really don’t understand how pension plans work… E pays $200/month into a company pension plan and makes $80 000/year. I pay the same, and am matched by my employer into OMERS, yet I only make just under $40 000/year… I’ve been told my pension plan is a good one, though I still contribute what I can to a TFSA… I assume E’s an is a good one, if not the same as mine, as he’s a government worker. How is that possible? Curious…
July 26, 2012 at 8:38 am
ING hasn’t had the best rates in 3 or 4 years. Try one of the on-line credit unions like Outlook Financial. They’re Winnipeg based, your deposit is insured and their rates are a almost a full point more than the orange people. Today, a Savings Account pays 2% and 1 year GIC is 2.15% while ING is paying 1.35% for both.
Every little bit counts.
July 26, 2012 at 9:24 am
Cas, I think E meant that they are putting $200/month into an RRSP. That’s the only way it makes sense to me, because that would be an insanely low payment for a pension fund at that salary.
July 26, 2012 at 9:28 am
K: on your Notice of Assessment, it will tell you what your current RSP deduction limit is; example on your NoA for 2011, it will say your limit for 2012. You have an ‘over contribution’ limit of $2000 without penalty, so if you do contribute too much, it can be carried forward and deducted for 2013.
C: sounds like you are responding to the next best thing, rather than thinking about and looking at the long term. I have also picked the losers in the past, but what worked in the long run- I stumbled upon a very stable bank no-load fund and put $$ into it each month for years, while I researched the different kinds of investments and tried to understand them. If you don’t have a lot of money to invest, mutual funds are good. Be aware, that EVERYTHING is down right now, so your fund may or may not be behaving normally. It might be a good idea to talk to someone at your bank and go through the risk profile exercise to learn about yourself. You don’t have to buy what they are selling.
Cas: the amount that is contributed to a pension plan depends on what is negotiated with the pension trustee up to a legislated maximum. Perhaps you have already reached the maximum that is legislated. E doesn’t say what government she works for. I do know that OMERS is one of the more expensive plans, BUT is one of the best in Canada.
R: Inerest rates all over are at an all-time low and will be so for the next few years. How many $$ are you talking about? If the difference is only a few dollars a year, it may/may not be worth it to switch banks. What is the purpose of the funds? If they are for a specific purpose, then look for an instrument that matches your timing and accessability. Use a savings account at .04% for something less than a year; use a GIC at 1.5% for something at two years (or 3 or 5, etc); use mutual funds for long-term growth (bearing in mind that nothing is performing right now, but it’s a good time to buy).
July 26, 2012 at 9:53 am
Another thing for K to consider is this–is she going to stay in the same city when she retires? If so, I don’t think it matters if she moves now or later. She’s likely going to want to downsize eventually and if her home has decreased in value, there’s an excellent chance that the house she wants to buy has also decreased (maybe not by as many dollars, but it still will be lower than if she waits until her house–and the smaller house–go back up to their original value). And she’ll have to pay lawyer’s fees and moving fees later anyway. Plus, if the new house is smaller, her utilities and taxes will also be less (and she should move sooner to save that money).
July 26, 2012 at 11:32 am
@ K Two years ago I sold my home at a slight loss at the bottom of the real estate market in the city where I live. A year later, the people who bought my home sold for 19K more than I sold for. The only change was a renovated kitchen. I do find myself wondering if I had just held on for another year, whether I actually needed to have “crystallized” that loss. Moving costs were slightly expensive but MUCH more time consuming than you ever anticipate. Hookup fees, transfer fees for bank account info, etc.. ETC> ET CETERA!!!!!
For what it’s worth, I would stay put, get the MTG paid off and enjoy the extra space and peace of mind for actually enjoying and living your life.
July 26, 2012 at 1:11 pm
@ Karen: the ‘only’ change was a kitchen reno? That’s the most important one, with the best return on investment (as long as you’re intelligent about it)! Plus, it’s the most expensive reno – they likely spent very close to 20K on it. The people who bought it from you might have taken a loss on the sale because of that reno.
If you had held on to the property for another year, and didn’t renovate the kitchen, it’s very unlikely that you would have been able to sell it for the same increased price. If you had held on to it, and did renovate the kitchen, you would probably be exactly where you are now, money wise.
July 26, 2012 at 2:31 pm
@Megan. Very possible. They changed the colour of the cabinets is what I meant – not much else.
My point is that the market was quite depressed, and even a year’s turnaround can make a difference in purchase price. If K sells at the low end of the market and it rebounds, there is no way to make up the difference she will take on the loss.
I love my new house – it is fabulous – and we also bought that at the low end of the market so what goes around, comes around:)
July 26, 2012 at 6:46 pm
K – I too was looking at downsizing — I live in the Calgary area (sm town) I believe the values of real estate in AB will increase! I’m perservering as well because I believe my children (& grandkids) need a HOME to gather at. I have taken in a roommate — you have to find the right person, but it’s not too bad:)