## This & That: Do The Math Edition

D Wrote: I’m 48 and recently got our family spending under control, so that now we can live within our means. The problem is I have a \$125,000 line of credit costing me \$450.00 a month in interest. Aside from a paid off house and \$200,000 in RRSP’s I have about \$133,000 in an investment account, still down \$22,000 from the 2008 hit. It seems obvious to cash it in, pay off the line of credit, and start rebuilding the account, but am I missing something. Is this really the best thing to do?

Gail Says:  Is the investment portfolio producing more than the \$450 (after taxes) a month it’s costing you to carry the line of credit? If not, get rid of the line.

T Wrote: You are my money GODDESS!! I work at a bank so as much as we have to use our own prescribed worksheets and tools for our clients; I still direct them to you!  Now, on to my question; in the process of saving for a house and Christmas and vacation and etc, etc, etc (as you probably already know there is no shortage of things to save for) I have been flirting with the idea of selling some paintings that I do for a little extra cashola. Is there a way that I can calculate if it would be worth my time/energy/supplies and turn out a profit? (A work sheet, perhaps?) Also how would I account for inventory left over on such a budget sheet? And on my own budget sheet, where would the money for supplies fall?  Thank you for having such a profound influence in my life Gail!!

Gail Says:  You’re a smart girl; you can build a spreadsheet for this. First you’ll have to estimate the costs associated with supplies. Canvas is easy, cos it’s one per. But paint, linseed oil, turp, and all the other “replenishable” supplies will mean you have to estimate how long these last (# of paintings) and divide that into the cost for your supplies. It may take a few months to get a good handle on this, so you might as well start now. And then there are the things you replace less often, like brushes, palate, whatever else you use. Then, of course, you have to account for your time. Will you charge your time at \$10/hr, \$50/hr? Or will you not price in your time because you would be painting anyway since it rejuvenates your soul? Next comes figuring out what you can sell your “product” for, and if there will be costs associated with selling your finished work.  As for inventory, you can price it at the cost of supplies plus your time, if you’ve made a time-count.

R Wrote: My name is Rebecca and I am a 24 year old student in my second year of schooling and I also work between 28-30 hours a week in a retail store as a supervisor making \$13.90 an hour. I am having a bit of difficulty with trying to calculate my net income and my gross income. I also have about \$8600.00 dollars worth of debt and I was just wondering what the best way to pay that off would be?

Gail Says:  Your gross income is what you make before you pay your taxes. You don’t have to calculate this at all. Forgedaboutit. Your net income is what’s really important because it’s the money you have to work with. Look back over your bank statements. Take the last six months’ worth of payroll deposits, add ‘em up, divide by 6, that’s what you average per month in net income. As for getting the debt paid off, you need to make a plan. That entails deciding how long you want to take to pay off the debt, then creating a debt repayment plan to get you there. If you’re a student your first priority should be to pay off any consumer debt you have first. Leave the student debt for when you’re done school, and minimize any more debt.

D Wrote: I have never had the need to ask a direct question but today I was reading a guest post about cars and that got me thinking you may be able to help me with a car related question.

I’m 30, in a great job which I love and make decent money. I don’t have debt; I am working toward an emergency fund and maximing my retirement accounts. I have a plan and I pretty much stick to it while still managing to have fun I currently rent by myself (soon to be with a roomie for company and to share costs) and I am perfectly content taking public transit or walking/biking to and from the places I need to go.

Well now my employer has thrown me a curve ball and I admit I was expecting it. In my position travelling is becoming necessary, mostly by car at this point. He would like to lease me a company vehicle because I don’t own a car and I don’t want to own one. Our company location is downtown and we both feel to keep the car in a parkade all the time while not in use, is not safe. The other option is for me to use it for personal use when I’m not using it for work and park it at my apartment (much safer and free). This is where I have tried to get information and I am very confused. My question is I want to know how much I will have to pay each year to have the company car for personal use. This was not in my budget and while it would be nice to use it, I don’t want the cost to derail my plans. The car we are looking at is about 40g and I’ll only use it personally probably less than 20% of the time. If there is some easy to understand resource out there, please let me know.

Gail Says:  This is going to get a little complicated. Let me give you the short answer first, and then I’ll give you the long version.

The short answer: if you take that car home, you’re going to pay a lot more in taxes.

The long answer: If you take the company car home you may end up with two taxable benefits included on your T4 slip for:

1. A stand by charge for your personal use of the car, and

2. An operating cost benefit that applies if your employer pays for the car’s operating costs … think gas and maintenance.

The calculation of the standby benefit differs depending on whether your employer has bought or leased the car.

If the car is purchased, the standby charge will be 2% of the original cost of the vehicle (plus sales taxes) x the number of days the vehicle is made available to you ÷ 30.  So if the car cost \$40,000 (tax in) and you parked the car at home 365 days a year, you’d have a taxable benefit of (\$40,000 x 2%) x 365÷30 = \$14,600.

If the car is leased, the standby charge will be the monthly lease cost x the number of months you take the car home.

You can reduce those standby charges if you don’t use the car more than 1,667 km each month, or 20,004 a year and the business use of the car was more than 50% of the km driven. You’ll have to keep a log book to record the personal versus business use of the car and the total number of kms driven. And since driving to and from work is not considered business use, you’d best be on your way to see a client when you leave home, or before you head home to minimize your “personal use”. Keep in mind that as long as the car is parked at your place, the standby charge applies, even if you’re on vacation or out of town on business.

The operating cost benefit is a rate per km to cover the costs of fuel, oil, maintenance, insurance and licensing that your employer pays.  If you use the car for business more than 50% of the km driven, you can request in writing to your employer that the operating cost benefit can be a flat 1/2 of the standby charge.

Gail Says:  In the best of all worlds, your sister might be able to get 7% a year on average from her money. That would give her an income of \$1,750 a month. Could she live on that? In the real world, with a high need for security, she’s much more likely to get 3.5% right now (if she’s lucky), so her income would be half that. So no, I don’t think your sister can avoid working. She could take in housemates to make some extra money. She could get a part-time job to make the money go further.

As for what it should be invested in, your sister needs to make that decision. Safe investments aren’t paying much about 2% right now, but the principal would be guaranteed. Mutual funds are good if she understands what she’s buying and has a stomach for the ups and downs. If she can’t stand the thought of losing money to market changes, she needs to stick with what’s safe. Alternatively, she can look at segregated mutual funds available through an insurance company. They come with a principal guarantee after 10 years. So if the market is down, while you may have earned no return, you’ll get you dollars back, assuming you get a 100% principal guarantee. There is a cost, of course: lower returns because of the “insurance” aspect.

J Wrote: I’m prone to a mental trap about prices; when I start with a base price, adding smaller prices to the total doesn’t bring any buyers ‘pain’. So I’m like the frog in the pot, I’ll stay and get boiled by high prices, that would make me run away if they had been upfront, because in my mind they were added piecemeal.

Do you have any mental tricks artificially simulate buyer’s pain in this situation? I’ve seen the consequences of this mental trap when it is unchecked and I want to avoid them.

I have a mental trick to guard against the 99 sellers trick. I trained myself to round prices up by looking at the end digits’ value first, deciding if I’ll round up, then looking at the leading digit value.

Gail Says:  Since you know this about yourself, you need to put what you know to work for you. Now you will NEVER buy anything until you have added in all the little extras so you see the big number and can feel the appropriate “pain”. That is the only way not to get boiled. All you need is a pencil, paper and calculator to add the extras to the base price and come up with the total price. Then walk away for 24 hours and let your brain decide if it’s worth it to go back and finalize the transaction.

J Wrote: I have a question regarding child care costs. We have a live-out caregiver for our three kids who makes just slightly less than I do at this point, taxes included. In the context of things like trying to get ahead we consider that this cost is becoming prohibitive for us, but my husband is vehemently against any other type of solution, like daycare.

He thinks the nanny solution is the second best thing to a mother staying home; however he keeps talking about how the cost of this caregiver is sucking up half his salary.

I am wondering whether I should be the one to try and work harder and make more, or whether I should work less and find someone to come in on a part time basis.  The problem with finding care part time is that most places and most caregivers want a full time contract.  And yet, I would not be against working part time for a little longer until the kids are older.  What kind of advice would you give to weigh these issues out?

Gail Says:  When I had my nanny for my two kids, it took all my income to cover my share of the household expenses and my nanny, but she was worth every penny. You have to decide what your priorities are. If your husband thinks the nanny solution is the second best to you staying home, then tell him to stop whining or you’re going to stay home yourself. You both decided to have three kids. Did it not occur to you that this would severely impact your income and expenses?

Sit down and do the math. Make a budget for:

1. You staying home

2. You working part time

3. The nanny and you working full time (no harder than your husband works, btw)

4. Daycare

Then make the decision that best suits your needs and wants. And then everyone shuts up about it. No more whining.

### 15 Responses to “This & That: Do The Math Edition”

1. Gail said: >>> Alternatively, she can look at segregated mutual funds available through an insurance company.

Careful! Definitely have to do the math on that one. First, the guarantees differ from product to product. Secondly, the principle is normally what’s guaranteed not the interest. If you deposit \$10,000 and earn \$10,000 in interest over 10 years you now have \$20K. Market crashes 40% – leaving you with \$12,000. No guarantee is likely in effect – you have \$12,000 but your principle is \$10,000. In other words, all of your interest you’ve earned has to disappear first, before \$1 of guarantee happens (generally, as I mentioned, these guarantees differ).

I am ultra conservative with my savings/investments. So I had funds in seg funds. Then I did the math, and no longer do so. If you want to see the math I did, it’s in a guest blog post here:
http://www.thepassiveincomeearner.com/2012/07/mutual-funds-vs-seg-funds.html

2. What all these posts tell me is that most personal financial decisions are not rocket science, but are quite easy to figure out (except for the company car post) if you:
1) know what is important to you (ie know what you need and want); and
2) break it down into pieces and compare.

It’s about stopping and taking the time to break things down and really understanding yourself and if you are in a relationship know the dynamics that come into play.

As long as you have that foundation, most decisions become much clearer and are able to be resolved.

I live by “there are always choices, you just might not like the inconvenience of some of them”.

For example @lifeinsurancecanada, Gail is offering a very basic/risk free option in the insurance point only. If you don’t like that, you have to be more risk prone, otherwise you are creating this circular reference that won’t come to a conclusion.

3. Good questions.

4. Christine Says:
August 22, 2013 at 10:46 am

For D. regarding a business car. Has your employer investigated car share companies? Toronto has 2: Autoshare and Zip Cars. I know Autoshare has plans for businesses. It has great benefits in that they maintain the cars, pay insurance, parking etc for you. All you have to do is book the car ahead of time and pay your bill. Worth a look.

5. To J.
Hello I’m am not sure where in the country u are but have you look into an “Au pair” nanny program?
We a a young Swiss nanny. She live in our home, we have to guarantee 15 hours a week if work at 2.00\$/hours. 2 bucks that is right .
We live in a ski town so we also provided a ski pass. And a retur ticket home after her 12 months contract . I know 1 year is short but u can renew if she wanted to. There is many program similar to this and I found that it give the kid the some cultural knowledge .
We love the au pair.
Look it up.

6. To H,

I think it depends on where you are in your life. I always say no to mutual funds because for various reasons, these actively managed funds cost too much and have inferior returns compared to index funds. If you can tolerate a bit of risk, index funds are the way to go. At age 50, I think you can probably tolerate some risk but not a lot. The thing with index funds is even if the market drops 50% like in 08-09, it will recover if your resist the urge to sell. Of course if you need money at that particular point in time, things can get hairy. If you want to be a bit more adventurous you can consider dividend growth investing, which will give you a steadily increasing income stream as you age, although many index ETFs and index funds also pay dividends. Unfortunately, at age 50, your sisters time is a bit limited and index growth investing really works with a time horiizon of 20 years or more, although in 20 years, your sister will only be 70 and these days if you make it to 60 they say you can expect to live another 27 years, more for women.

One thing I would stay away from is real estate, especially condos. It’s too much of a hassle to rent it out, and then have to also pay out for any repairs, taxes, transaction fees, etc. Real estate as an investment just costs too much in Canada right now.

7. @ Kratos – good points but (a) the market MAY recover, not WILL recover. Or at least you could say ‘will likely recover’ but there is the possiblity it won’t and (B) there are mutual funds that are index funds like the td e-series mutual funds, but admittedly when people say mutual funds they usually mean expensive ones).

8. J: Childcare vs. no: Look at the numbers carefully. Where I live, (in Vancouver), daycare for my young twins cost slightly more than a Nanny. While daycare cost goes down as kids age, over the long term we still feel we have broken even on the childcare front. With 3 kids, you may find that a Nanny is still an affordable way to go. Remember, you can deduct up to \$7000 per child on your income tax by providing her SIN.

Now, as for working or not… it kind of depends if you enjoy your job. If you hate it, and want to be with the kids, then that is one thing, but if it is fulfilling, and you breakeven, then it may be worthwhile. Remember that this childcare thing is short term, over the long time your kids will be in school, and having stayed in the workforce will increase your long term earning potential.

Finally, you are guilty of what many mothers including me do: In your budget, you deduct childcare expenses directly from your income, not from both. If you are both the parents, and you are both contributing, then childcare should be a shared expense.

Thanks for letting me rant, as a working mom who also controls our family’s finances, I’ve gotten very good at this kind of math!

9. Geoff,

Nothing is for certain, but markets have always recovered. Of course, you could put your money in the bank and have it go bankrupt and lose all your savings too, except for the minimum 100k that is insured. And of course, it may take 20 years or more for the markets to recover, but it will. For a 50 year old who today can expect to live at least another 30-40 years or more, that’s still a long time horizon. It’s all about risk and risk tolerance. Index funds will never drop down to zero, else the whole economy will be dead. There’s a ny times article recently that says 1 million bucks isn’t enough for retirement these days, especially with a high probability that people will live into their 90s. That’s why I think it’s important to be a bit more aggressive in your investments but properly diversified to mitigate risk. Yes the main risk in buying stocks and index funds is just poor timing when you need the money and the markets happen to be down. But that’s why it’s also important to have some cash on hand. You could also say that for real estate too. Except real estate is a bit harder to liquidate in a down market than stocks are.

And yes, Index funds are technically mutual funds but they have much lower MER. That’s the point. I usually buy vanguard ETFs or the TD e series index funds in my RRSP and TFSA. The rest of my investments are in mostly large cap stocks that have a history of paying increasing dividends with some medium cap Canadian stocks that are a bit more risky. And I also have a mortgage that is not more than 10% of our net income. The key is not to put all your eggs in one basket. Too often people over leverage themselves in real estate. Big mistake.

10. @:tasii “For example @lifeinsurancecanada, Gail is offering a very basic/risk free option in the insurance point only. If you don’t like that, you have to be more risk prone, otherwise you are creating this circular reference that won’t come to a conclusion.”

Actually, that’s why I posted the link to the article. Seg funds are purported to have guarantees, at an extra cost. in the article, I actually ran the numbers to see what happens in different calamities.In good times, mutual funds were better. In catastrophic times, mutual funds were about the same as seg funds, after which the mutual funds recovered faster and then outperformed seg funds again.

To get an scenario where seg funds outperformed mutual funds, I would have to imagine a scenario so catastrophic that I think the entire economy has collapsed. We’re talking like a 60%+ drop in investments. Could that happen? Sure. Willing to pay a premium when that’s the only scenario where the extra premium pays off, and other scenarios are not winners for seg funds? Not me – I moved my money from seg funds to mutual funds after I wrote the article .

FWIW, the numbers I used in that article were for the TD E-series index funds being mentioned in other comments. I compared TD E-series, with a seg fund that tracks TD E-Series index funds.

People promote seg funds as having guarantees, but IMO, those guarantees are effectively worthless.

11. The 50 year old woman has a serious risk of running out of money with no stocks in her portfolio. She should invest in low cost index funds, at least 20-25% stocks, the rest can be safe stuff like government bonds, but you need at least some stocks to survive inflation.

12. Just want to invest to save Says:
August 22, 2013 at 4:43 pm

I would appreciate information regarding finding investment assistance. If I go to the bank they only want to sell me more lending products, for example a loan for RRSP season or a loan to consolidate which defeats the purpose of making payments to reduce debt in a timely manner.
Apparently I do not have enough money to see the INVESTMENT banker. Really?? I am trying to save enough to make investments not another loan. Two banks same thing, so frustrating. Had an investment guy once only heard from him at RRSP season once and then he disappeared, the next year a new guy called as it was now his territory. Any advice or assistance appreciated.
Websites, obviously this is great, but for investment information, magazines or book recommendations appreciated. I find it very frustrating and overwhelming at the moment. Do I just stick with a savings account?
Thanks

13. Just want to invest to save, try doing some reading at:
milliondollarjourney.com

Forget the bankers. You need to educate yourself and take control. I think Gail may have a recent book out that talks about investments. But here’s the two cent tour:

- you need to decide your asset class. There are four basic ones, real estate, cash, bonds, and the stock market. (mutual funds are generally just the stock market, but sometimes blend other asset classes in as well). Canadian couchpotato posted recently some research that indicated something as simple as 50% bonds and 50% stocks is actually a pretty darn good investment strategy.
- then you need to decide how to get each asset class. cash is just cash, in a savings account. bonds you can get at the bank, through a mutual fund that’s bonds. Real estate, you can’t easily do for a beginner (you’ll need a REIT, so fuggedaboutit for now). And lastly, stocks. For stocks the recommendation from academics tends to be ‘index funds’.

So from the above, here’s how I would design a beginner investment strategy (personally, this is not my business stuff):
- 50% in bonds through a bank
- 50% in a straight generic index fund, like the TD E-series.
- regular contributions
- rebalance 1-4 times annually, as the mood strikes you. That means move money from one to the other to get back to the 50-50 split

Your reading then allows you to agree or disagree with me on all those specific points. Or alternatively, if you research the reasoning behind those four points you may see the reasoning for and arguments against.

The problem with the above isn’t the strategy though. It’s the people. Let’s say bonds suck, and index funds are going through the roof. Can you really move money from those hot index funds and into crappy bonds? Or conversely, if the stock markets have crashed, can you really bear to move money from bonds into the index fund/stock market?

Start there anyway. What investing is NOT is the overriding confusion presented by trying to pick a bunch of mutual funds – that’s the wrong approach.

14. Just want to invest to save Says:
August 22, 2013 at 9:19 pm

Thank you for the information. It is very much appreciated.
I have some reading to do.

15. @Just want to save

I had a very bad understanding of investment options until a friend told me about the book “Millionaire Teacher”. I cannot say I am an expert now…lol
I’ll never be…but I do have a better understanding of the world of investments.

The author’s website is http://andrewhallam.com/

Regards,

Mena