What You Don’t Know CAN Hurt You
Posted by Gail | Filed under This & That
The talk this week is all about the central bank dropping interest rates to 0.25% and promising not to raise them for a year. That would effectively eliminate all the worry about converting a variable rate mortgage for quite some time. Good news for those who have been stewing about what to do, what to do.
This week has been full of question… a higher than normal number came in, and I’m happy to report I got some of the best questions – most thoughtful and proactive – I’ve had yet. Y’all are getting it and it’s showing in your thinking.
There are still a few people who are surprised by things that happen financially or are operating under misconceptions. Here are some examples of what I mean:
S wrote:
I got my tax package back from my accountant and learned that I owe a tax bill of $1700. I was floored – especially since I was expecting a refund of about $4000 due to a large RRSP contribution last year. I discovered that while I was on maternity leave for most of 2008, not enough income tax was deducted from my EI benefits and my employer’s top-up benefits (yes, I’m one of the lucky ones whose employer pays us extra while on mat leave). This happened because each entity calculated my income tax deduction as if that pay stream was my only income. I’m gobsmacked and “mourning” the loss of the cash I was expecting for a refund that was going to be put towards other goals and I feel “robbed” of the money that I will have to use to pay the tax bill. I’m upsetthat I did not know that I should have checked the tax withholding on my two streams of income (EI and employer benefits) to ensure the calculations took into account my total income. Do you know if this matter is a common mistake, or is it common knowledge? Shouldn’t the EI people warn you about this when you apply for your maternity-parental leave benefits? Can you let your maternity/parental-leave minded readers know about this potential pitfall?
S is not alone. Very often people who take second jobs or go off on maternity leave benefits do not manage their income tax withholding so that enough tax is taken. The result: they end up with an unexpected tax bill. It’s not up to the payroll department to ensure they’re taking enough tax for your specific circumstances. They need only take enough to meet the withholding tax rules. It’s your job to make sure there’s enough tax being withheld. So heed S’s warning and make sure you don’t get hit with an unexpected tax bill.
J wrote:
I just received a pleasant little note from one of my banks (RBC) – which holds both my car loan and PLC – that the premium on the interest rate for the PLC has been hiked from prime + 2.5% to prime + 5.25%. I have been making only the minimum payment on this account in order to pay off the CCs. Was this a mistake, and should I bother to try to renegotiate the rate? Would another lender consider consolidating my PLC and CC debt at a lower rate, or is this a bad time to ask for such ‘favours’ from any lending institute?
J has bumped up against the reality of the new economic climate. I’ve been getting a lot of letters like this one: people who are desperate because their lenders are raising their interest rates (making the minimum should not create a problem as long as it was made consistently), or calling their loans. For EVER I’ve been trying to get the message out that credit is not a reliable source of money – how long have I been saying a line of credit is NOT an emergency fund? – and now that people are being faced with a different reality they’re really thrown off-kilter.
My girlfriend, Victoria, was offered a line of credit recently and when she declined she said, “You can give it, and you can take it away, no thanks.” The young lady behind the counter cocked her head and asked what Victoria meant. Victoria had to explain to “the banker” that a line of credit (like a credit card) is “callable” credit… the bank can demand repayment at any time. Apparently the young miss didn’t know that! Hmmm.
I think it is ridiculous that as the central bank’s rate has fallen, some lenders have seen this as their opportunity to make more money. With interest rates at a historical low, these aren’t the letters I should be getting. I strongly suggest that consumers – particularly those with a good credit history and sound financial foundation – find a new source of money that isn’t rapacious in it’s lending practices. Check out your local credit unions as an option. Better still, get the hell out of debt!
R wrote:
My spouse and I separated almost a year and a half ago, and the first year of separation he claimed my daughter on his income tax. We agreed that we would alternate years to claim her. Is there a better way of doing this? We have shared custody and she alternates weeks between the both of us with the exception of times when he is unable to have her because his work takes him out of town.
R and her partner have come to a solution for how to used the equivalent to spouse credit for a dependant child. And, no, there’s no “better” way. I hope y’all know that if you are the supporting parent of a child, you can use this claim to lower your taxes. BTW, the Tax Man’s rule on this is whoever claims first gets the credit, which makes a good case for filing early.
M wrote:
9 years ago when my husband and I purchased our first home, we borrowed from my RRSP under the home buyers plan. I have been consistent with the re-payments annually however, we have been gifted $5000. My question is should I (am I even able to) put this on the home buyers plan? So that I am earning on my RRSP again. Also, I don’t know where to find out what the remainder is that I owe.
Did you know that you can pay back as much as you want whenever you want? M makes a good point about earning money on their RRSP… since you’re not paying interest on your HBP loan, your RRSP is earning no return. The sooner you can get this money back into your RRSP and invested, the better. As for how much you still owe, check the annual Home Buyers’ Plan (HBP) Statement of Account that the Tax Man sends with your notice of assessment.
Ashleigh wrote:
I have been a huge fan of the show and have taken and applied every possible piece of knowledge that you have given out. (i.e.; live on cash, cut up the credit cards, write everything down etc) I even went out and got a 2nd job just to put towards paying off the debt that both my better half and I have (approx $37,000) after buying our house last year. I have gone from ignoring the problem and making it worse to being obsessed and completely consumed by it. Everything I do I am running the numbers in my head – if I spend $10 to get my car washed then that is $10 less I have to put towards debt type of attitude. It is driving me and my better half insane because we make nearly $140,000 yr and we can’t do anything fun. I even run numbers for my next 4 weeks paycheques in my head while I am in the shower! I am wondering if this is common to go from denial to obsession and what I can do to curb it as life isn’t any fun anymore. HELP!!!
I’ve never been a proponent of all or nothing. I’m the girl who keeps trying to tell y’all that balance is the name of the game. Once you have taken care of the must dos, you can breathe easier. Plan like a pessimist so you can live like an optimist… Okay, so where’s the optimism in this letter? Ashleigh’s pendulum has swung too far in the opposite direction, and this is as unhealthy as ignoring debt and not being aware of what you’re spending. It’s an easy trap to fall into. But staying there is anathema to a healthy relationship and a happy life. So Ashleigh, make a plan, follow through, and relax. Don’t make yourself crazy. Do the details and then have some fun.
C wrote:
I am turning 31 in a couple of months and wanting to start an RRSP how much a month do I need to put into the account to have 1 million by the time I retire?
C has obviously bought into the Magic Million propaganda. Too bad. She’ll suffer frustration, she may take unhealthy risks, and she’ll wonder why she can’t make this happen. The Magic Million should not be the goal. Saving regularly and having a life too should be the goal. Perhaps the most frustrating thing about saving is setting the bar too high and then having to deal with the disappointment of not achieving the milestone set. (Equally as frustrating is comparing yourself with others and being unhappy with your outcome compared to theirs.)
I’ve written about the Myth of the Magic Million several times. It’s a myth because it was created to motivate people to put money away. But it is an arbitrary number picked for it’s marketing pizzazz. We need to get over it. The best you can do is:
- determine the amount you should be setting aside for the future (10% of your net income, or more if it doesn’t strangle your cash flow),
- set up an automatic savings plan,
- find investment options that suit YOU,
- stay the course.
Okay, while we’re on the topic of questions, I’m still getting a b’zillion requests for private consultations. Sorry, no can do. And people have taken to sending me very long questions full of all their financial information in the hope that I’ll make them a budget and a financial plan. Sorry, no can do. I’m happy to answer your questions. I love it when you send me a questions that makes me think hard! But I have neither the time or the inclination to take control of your money on your behalf.
I could hire a staff of smart, able people who could do this for you, but it would probably cost about $3,500 to do your analysis (yes, it takes time and effort), and another $200 a month (six month minimum) to keep you on track. Hey, if there’s a demand…
April 28, 2009 at 7:48 am
Wow! These are great questions.
Thanks for sharing Gail.
April 28, 2009 at 8:03 am
About the HBP. Is the couple contributing to their RRSP over and above the required HBP payback amount? If not then I can see the problem.
I contribute well over $6K to my RRSP (inc spousal) but my HBP amount owing (to myself) each year is $500. When I found out that I would not get the tax credit for the additional RRSP amount applied to my HBP payment – I decided that I can wait for the full repayment period to run out.
The money you apply to your HBP is going to into your RRSP, it is ending up in the same pot – it is just how you assign it and what amount you get to indicate as your RRSP amounts on your taxes (RRSP yearly contribution – HBP repayment = amount used on taxes).
April 28, 2009 at 9:02 am
+1 for Joanne above. Gail normally you’re spot on but I think you really hate the HBP based on this post and others. It makes no sense to pay back the HBP early. There’s no interest charged on the money owed, and by not claiming the majority of the $5000 for the HBP, she can claim it on her taxes and get a tax reduction. It is not normal debt, it’s at 0% and will always be at 0%. Depending on her income it may not even be beneficial to claim anything for HBP, her amount owing that year will get added to her income.
April 28, 2009 at 9:24 am
re: LOC increases – I was also notified of an increase in my unsecured LOC. However, I DID NOT ACCEPT what the bank was telling me. I went into my branch with my original LOC agreement. I advised them that I expected them to honour the agreement they went into just as I had been over the years. The rep checked my banking file (spotless) and decreased the rate rather than risk losing my business. So much for “everyone’s rate went up and there’s nothing we can do”. WE DON’T HAVE TO ACCEPT WHAT THE BANKS ARE TELLING US. We should always ask questions/object when people are “playing” with our money!
April 28, 2009 at 9:35 am
I can relate to Ashleigh…I find it difficult to balance budget with fun/life. Recently we have made HUGE progress with our debt, but still have that fear. I think maybe because it was soooo stressful that I’m scared it will happen again if I get too comfortable. Plus I am still struggling to get my husband on board with the budget, I’m scared that if I relax he will go spending again…
I am trying to work on it…ugh, life!
April 28, 2009 at 9:37 am
I really enjoyed this post Gail! My partner and I have been talking about purchasing a home together. I went into a branch of the bank I have been with for nearly 20 years and ended up having to explain to the “advisor” about the new and newly removed mortgage types that her bank once and no longer offers. On top of that she tried to talk me into taking a LOC or CC from them at higher rates than I’ve just renegotiated with the current holder of my credit. Then look completely perplexed why I thought her options weren’t as good as what I had found on my own.
the RRSP borrowing things has been quite a hot topic in my house lately, as there are people who are horrible with their money pushing me to use my RRSP’s to support a down payment for a house that will in turn end up being my purchase, and expecting that my partner gets equal credit for it. (can you tell I live with his family?) I have been weighing this option for some time, and had come up with a decision to leave my retirement completely out of the picture, and force an equal savings contribution from my partner on the house we are looking at purchasing, for what I thought was a good principle to stand by. This post has helped me seal my thoughts up tight by now understanding that borrowing against my RRSP’s mean they do not grow until the money is replaced – which could be any time from 1 month to 15 years of pay-back time.
I am not willing to put my future on hold for a purchase I am not completely sure I want to make on a place i am not completely sure I want to move into because some people and their misconceptions are so far in left field I wonder about their mental states some times.
Thanks again for these wonderful posts – and timely too!!
My tax return is going to paying off my car loan so I can concentrate on my CC repayments with more vengence!! (the return is the same amount left owing on the car, so while the CC interest is higher, I have only the return amount left on the car and thus just want to be done with it!!)
April 28, 2009 at 9:42 am
I got a phone call from my bank (TD) a few months ago. It kinda went like this.
Rep: We call you to inform you that your line of credit interest has increased by 0.25%.
Me: Whaat? Why?
Rep: Everybody received an increase on their interest. You actually got the lowest possible increase because of your good credit.
Me: (proud, and incredibly dumb) Oh, okay! That’s okay then. But why do they increase it?
Rep: Because costs of borrowing are higher for the banks too.
Me: (?!) Ohh.. okay, thank you.
Now how stupid is this? The cost of borrowing for the bank is the LOWEST ever and instead of being upset for having my interest increased I am flattered and act like a good customer… sigh.
April 28, 2009 at 9:50 am
I too have been in the position Ashleigh is describing. What I found helped was automatizing as much as humanly possible, so that whatever was in the jars was available to spend as needed-then I didn’t feel guilty about spending money on a car wash or something for basic personal care (I used to toy wtih not buying moisturizer for my very dry skin to save money-this was madness, as it seriously impinged on my daily quality of life as my face was itchy and red, and it could have long term health implications, as it has a strong SPF, a necessity for my fair skin. I explain this only to point out the way I used to drive myself insane with budget worries!). This allowed me not to think about every dollar and cent on an hourly basis-I spent a few hours once calculating and budgeting and setting up automatic debits/deposits etc. Now I don’t have to think about it constantly. I used to check my bank balance a few times a day, and now I check it once a week when I get the jar money. I hope you can find a good solution to help you regain balance Ashleigh-as Gail says, it is possible to have a life and to live within a budget!
April 28, 2009 at 10:06 am
I have worked two jobs for 6 years now (kind of addicted to it now!) and I always have to pay tax every year. This year it is $1100. My husband always gets a refund and he gives me half of whatever he receives and I just come up with the other half with the money from my second job.
I am also paying back my HBP loan and since I pay tax every year I always just want to pay that back so that I can use the full amount of my RRSP’s. I did the loan 10 years ago and always just paid back the amount that was calculated for me but now I wish I would have just paid the full amount back so that every dollar of my RRSP’s could go towards reducing my taxes. Just my 2 cents.
April 28, 2009 at 10:41 am
Donna;
in your situation if you don’t want to adjust your taxes withheld from your employers (which I understand and makes sense) it is understandable why you want to get your HBP paid off to apply your RRSP contributions when you do your taxes.
Geoff; thanks :0)
Pam; it is totally understood why you are hesitant to not pull your funds from your RRSP for your HBP. When my now husband and I did it 9 years ago we were engaged and beginning a life together 100% and although we did not each put in 50% (I had more to pull from than he did), we were doing it as whole ie; each willing to contribute what we had and completely committed to the process. Hold your ground and stay strong. You will be better for it.
April 28, 2009 at 12:44 pm
When I was young and very energetic and so deep in debt that we had to scramble just to pay our rent I worked 6 jobs at one time. One full time job and 5 part times. The part time jobs were “on call” jobs. Most weeks I worked at all the jobs but only for 4 or so hours each.
No deductions were taken off of my pay cheques because my pay on each cheque was always below the minimum for deduction. I did not know better and in truth I never gave it a thought – was just too happy to see the money. But then of course when it came time to file my taxes I got bit. And hard. All those little pay cheques had added up to a lot of earnings for which I had paid no tax. Add those to my earnings from my full time job and I got bumped into a higher tax bracket.
The following year I did put aside 20% off of each small pay cheque to pay the taxes but unfortunately the bedroom set that I had had my eye on went on sale and the super deal included a free box spring and mattress, sheet set and two down pillows. How could I not buy it? At least for the next 25 years I was comfortable as I lay lay awake at night worrying about our finances.
Needless to say it took that 25 years until we learned our lesson and decided to get debt free.
April 28, 2009 at 3:01 pm
Thanks Joanne – I like having the money in my pocket every pay cheque and it is usually only a month or so of work to be able to pay the taxes since I have a great husband who gives me half of his refund! Every year when I do my taxes I always think I should just pay this off and be done with it and have my full RRSP contribution working for me. Next year!
Maureen – I feel your pain! That first year of two jobs I was working to pay for our wedding. I was so happy that my husband and I were able to pay for our wedding by ourselves. Then I did my taxes and nearly died!! I think that first year was something like $2200. That only happened one year – I got smart after that. My cheques are generally $300 every two weeks but when you get 26 of them it adds up to $7800. This year I only had $120 of tax taken off those cheques!! If you are prepared for it you are ok but I also didn’t really pay attention to my pay stubs that first year.
April 28, 2009 at 3:02 pm
Wow, Alexandra, great work!
My partner would have to owe more than $10,000 in taxes for this year had he not shoveled money away into his RRSPs and also had I not carefully kept records of all his possible deductions and expenses throughout the year. Instead he’ll have to pay about $1200. I was disappointed we couldn’t have zeroed it but nonetheless, $1200 is a helluva lot better than $10,000!
Pam – that seems like a good decision, as long as you are willing to wait until you get that 20% downpayment. Everyone is in such a rush to get ahead, and I understand and respect your decision and willingness to wait.
April 28, 2009 at 4:42 pm
Everytime I do my taxes I have to pay…. between the multiple jobs (that everyone takes the minimum off of), or the maternity leave (EI takes almost NOTHING off), or being self employed or contract (where nothing automatically gets taken off), I have been in the habit of saving extra for the tax man for most of my working life. I figure it’s okay, because I get to choose what to do with it all year, (as long as I have enough by the end of April)! And if I have to pay less tax than I expected… well then I am even happier! It’s already gone in my head, so the left overs usually go to saving for next year and I feel ahead of the game.
I am too scared to borrow from my RRSPs or borrow to top up my RRSPs, is all seems too risky to me, like a buy-now-pay-later with your retirement!
April 28, 2009 at 5:12 pm
I think my husband and I are a little weird. He is self employed and I have rental income – so if we end up having to pay taxes above and beyond what we expect to – we are actually kind of happy – it means we earned more money. (We both pay taxes quarterly and save a little extra just in case we have to pay more – so either we having extra funds to shift to savings or we have the funds to pay taxes).
Pol* – I agree with you – borrowing to top up my RRSPs seems way to risky.
April 28, 2009 at 9:35 pm
To Pol*:
Either ask for more tax deducted of your income, or ask if you can do a source deduction for RRSP that can go directly from your paycheque to your RRSP account. That’s when you are not self employed. If you are self-employed, you can submit income tax payments through the year. check out cra.gc.ca to find out more, or call and ask questions, that way at the end of the year, no big surprizes, unless it’s a refund.
April 29, 2009 at 12:27 am
Can I bank name-drop here? Is that allowed?
re: LOC. I have (well, *had* after this story) one with the CIBC. All of my banking was with the CIBC before they tried pulling this latest LOC interest stunt. It should also be noted here that I have been with the CIBC since 1990. With a flawless record and a top-notch FICO score.
Two months ago the CIBC raised the interest rate on my LOC by 2%. I was beyond angry as the balance on my LOC was -$2.07 and had been that way for 5 years. The CIBC owed me money and yet they were increasing my interest rate! Outrageous!
Although I never use my LOC, I want to be sure that the interest rate is in keeping with what I “deserve” (based on my stellar FICO score) so that, heaven forbid, if I ever do need to use it then my interest will be very low.
I immediately went into my local CIBC branch and expressed surprise (not anger because that never gets anyone anywhere with banks) and asked them to reconsider. They refused. I invited them to look up my FICO score. They were uninterested and made no effort to look at my banking history or my FICO score. I politely informed them that if they didn’t reconsider then I would take ALL of my banking to another bank. They essentially called my bluff by refusing to budge.
I went bank shopping.
I am happy to report that *all* of my banking has now been migrated to ScotiaBank. They took the time to look at my FICO score (no worries; I have only had one other company peek at my credit history in the past 5 years) and instantly gave me a LOC with an interest rate that is as close to prime as anyone could wish for. So I also opened a chequing and savings account and transferred those (along with my RRSPs) to ScotiaBank.
So long, CIBC. Call my bluff and see what you get. Most importantly, ScotiaBank is treating me as a valued customer. I didn’t realise how awful the CIBC was with customer service until I looked elsewhere. I feel like I wasted 19 years of banking with the CIBC.
The moral of this story? Don’t let your bank take you for granted just because you have been with them for many, many years. Because they will if you let them. Sure, switching banks is a pain in the butt (changing payroll, bill payments and the like) but believe me, it can save you a lot of money. Not to mention how great it feels to be treated like a person again.
P.S. Gail: I have only recently discovered your blog (and have never seen your show; perhaps it’s on a cable channel that I don’t get as I save money by only subscribing to basic cable?) but I love it. I think that I’m pretty much on top of things with my finances but there’s always something more to learn and so I really enjoy reading your tips.
April 29, 2009 at 1:37 am
Hi Gail!
My husband & I love your show! We are starting the jar system and are very excited about it. I love how you answer so many questions as they help all of us in our struggle/journey
I just had a comment on the post about separated or divorced parents taking turns on claiming their kids. You are right that taking turns is the best way to do it. It has been my experience, however, that when both parents file claiming the children, the CRA asks for proof that the tax payer is eligible to claim the child(ren). The one who can prove the right to claim gets the deduction, if both parents have the right & can not agree on who gets to claim the then no one gets the deduction. I have not seen them base their decision on who files first. I could be wrong and in some cases they may base it on the first filer, I have just not seen that yet. I have only been preparing income taxes for 4 years though & see new things every year!
Thank you again for all of your hard work & inspiration!
April 29, 2009 at 11:23 pm
Karen: I had a very similar scenario with CIBC, just when I was at the age for purchasing a home and really flexing my buying power muscles, they pulled a stunt on me that did go over well. I called my branch, then I called head office, and the answer was always the same, that they weren’t interested in me. So I took ALL of my banking elsewhere and have been treated like a really valuable client (with an excellent credit rating) ever since with my Credit Union.
February 4, 2010 at 4:42 am
Hello. Fantastic job, if I wasn’t so busy with my school work I read your entire site. Thanks!