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…

Usually when we think about cutting back, we target stuff like coffee, lunches out and cable television. Wasteful, pointless things that simply bring us pleasure but no long-term payback. You probably get tired of hearing people say, “Skip lunch and you can save $10 a day, or $50 a week. That’s $2,600 a year.” Who wants to skip lunch every day? Besides if I skip lunch for a month and save $200, and then turn around and buy two tickets to see Jersey Boys, I’ll blow through my lunch savings in one sweep of the credit card…k’ching! Which is exactly the problem people have “saving” money.

Mentally, we perceive our various pots of money as having different values, and we react to them in different ways. The money we’ve committed to our Super-de-dooper cable package is “spent” money, even though with one quick call, we could cut our costs in half, and slam $50 a month more against our mortgage every month. The money we blow on our cell phone is “sunk” money… we’ve already spent it by the time we get the bill… even though a call to revamp our plan, and a commitment to using the phone only within the parameters of our plan could save us hundreds of dollars every month. We think switching banks is too much trouble. Gosh, just think of all the auto-debits you’ll have to change. We think of switching telephone providers as a major pain in the butt, even through we could reduce our long-distances charges significantly. We think of switching from Buying New to Buying Used as just plain yucky.

We have a saying in Jamaica: Every mickle makes a muckle. It’s much like the saying, “Take care of the pennies and the pounds will look after themselves.” If you even remember what a “pound” is.

Whenever I start telling people to find ways to save, they start finding ways to tell me why they can’t be bothered. “Sure, I can give up eating lunch out and save $25 a week,” they say, “but what’s that really going to get me?”

If I could show you a way to save $30,000 off your mortgage and cut three years off your repayment, would you be interested?

On a $250,000 mortgage at 6% amortized over 25 years, if you find a way to add an extra $100 to your monthly payment, you’ll save $32,640 off your mortgage and chop 3 years off your amortization. Want to see how you’d do on your own mortgage. Head to Citizens bank’s mortgage payoff calculator and let it do the math for you.

Most people never realize the gains they could make because when the do something to “save” money, they leave their “savings” in their wallet, where it eventually vanishes into a cup of coffee, a new magazine, or a DVD for the kids.

If you want to make your “savings” work as hard as you do, then you’ve got to apply them somewhere important quick, quick like a bunny. Let’s say you do decide to trim your lunch habit by $25 dollars a week, or $100 a month and use that money to pay down your credit card balance. Each time you don’t spend that money, take it home and put it in your Credit Card Jar. When you get to the end of the money, apply it to your balance, and watch your interest costs drop.

“Saving” doesn’t have to mean giving up everything you love to do. It just means looking for ways to take the money you may be spending unconsciously, and finding better uses for it. It’s moving from the routine spending we do habitually, to purposely deciding to buy that beautiful bunch of flowers, that warm, delicious muffin, or that cozy new pair of gloves. And if we decide we’re going to cut back on something so we can have something else – OMG, you mean prioritize?! – then we’ll apply those savings to our big goal before we have to chance to blow them.

I’ll bet there’s a bucket-load of ways you’re spending unconsciously… blowing money that could better be used to pay down credit cards, get rid of big, fat mortgages, build up emergency funds. I’ll bet you can find the $100 a month that’s gonna save you $30,000 off your mortgage. Why don’t you take a look?

I received 23 Entry Posts for the Getting to Debt-Free section of the site. Thank you all for sending in your stories. Watch over the coming weeks for when your story is posted. I chose by random Pull a Name from a Hat method two names. The winners are:

• Diane’s Story, Getting to Debt Free, Accepting I Can’t Keep Up With the Jones’
• Doreen’s Recipe for Good Debt Versus Bad Debt

Please send your snail mail addresses to getgvo@gmail.com and I’ll ship ‘em off to you right away so you can get busy using them.

Lynda wrote to me to say she wants to join or set up a Gail Club in the Windsor/ Essex County area. If there’s an existing group, or people who want to join Lynda is setting one up, reply to me at the above email and I’ll send your contact info on to Lynda. Then, when you’re set up, let me know and I’ll blog your existence so others can join in on your fun and learning. Lynda, in my frenzy to clean up, I think I deleted your email so send it again.

Speaking of which, remember, if you want me to broadcast your group’s existence, just email me at the above address and I’ll blog about you so people can find you.

On my last blog, Marie posted this question:

Why isn’t there a separate line for interest accumulated on loans or credit cards [on my budget worksheet]? It seems VERY efficient on the show when you highlight how much of the budget must go towards that expense and it would make people look it up. How much are you wasting every month?

That’s a terrific last question, Marie. The reason the budget doesn’t break out the interest you have to pay separately from the principal is that I just didn’t think people would got to the trouble of using it. It’s easy to add a line to the budget and break out the interest from the principal when you download the budget, so anyone who wants to see in black and white what their debt is costing them, I encourage you to break it out.

Josef asked:

When I was reading the first few words of your recent blog, I thought for a second you were referring to piggy bank jars. I’m recently starting to fill one up. What’s your perspective on them?

I’m not exactly sure what you mean by “piggy bank jars” Josef. If you mean using a jar to accumulate your change, that’s okay as long as you put that money into an account earning a decent amount of interest at least monthly. After all, if you have loads of money just sitting in a jar, that money is doing nothing to earn you more money.

Recently I’ve had a few of questions dealing with life and disability loan insurance, like this one from Jan:

Hi Gail. I have a question about my lines of credit. I have a loanprotector insurance premium coming out of my line of credit. It is $60 on a $50,000 line of credit. when I asked the bank they said that it is insurance on the line of credit in case of disability. Is it worth it to have this kind of insurance on the LOC?

Jan, while the insurance seems really expensive (it is really expensive), if you have no other disability insurance, then it’s a good way to protect your cash flow should you become disabled. After all, what could be worse than losing income to a disability and then finding what little income you do have eroded by debt repayment.

In a perfect world, you would have your own individual disability insurance, and you would have no consumer debt, so loan insurance wouldn’t be necessary. Until you manage to achieve debt freedom, loan insurance is part of the cost of doing business.

BTW people, if you’re breaking out your “interest cost” separately from your principal repayment costs, you’d add your loan insurance costs to your interest costs to see just how much of your hard earned money is going to supporting your debt habit.

And finally, a short case study for those of you who love ‘em:

Bobbi is a 24-year university graduate who feels she’s carrying too much debt. She’s currently working as an ESL teacher earning about $1600 a month net, and she plans to keep this job until she goes back to school to do her Masters in September 2009. Bobbi has a student loan of $23,000, which her Dad has agreed to pay off on her behalf. She has another $25,000 on a line of credit, and $4,000 in credit card debt. When Bobbi goes back to school for her Masters, she expects she’ll have to take on another $25,000 in debt. Bobbi feels overwhelmed. She believes if she starts making smart decisions now she can slowly build a bright financial future for herself, but she just doesn’t know where to start.

What would you recommend to Bobbi? Make sure your recommendations are supported by cold, hard numbers (i.e., what Bobbi will have to pay monthly to deal with her total debt load before and after her Masters degree.) You want to convince Bobbi that the path you are recommending is one that will take her where she wants to go. Firm, realistic, and supportive recommendations make the most lasting impression.

Do me proud, people!

Getting a loan costs money. You know that. But do you know that the worse your credit history the more the loan will cost. Routinely I work with people who are carrying car loans, even consolidation loans, at wickedly high interest rates. All because they’ve ruined their credit and the lender is making them pay for the higher risk of default that they pose.

With the recent credit crunch, some borrowers can’t get a loan at all because they don’t meet the new higher minimum credit standards.  Yup. The criteria are changing, and it’s getting tougher and tougher to satisfy lenders.

According to a New York Times article on October 28th, “Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments.” As a result “Faced with sobering conditions, companies that issue [credit] cards are rushing to stanch the bleeding”.

Credit criteria have always existed but have been virtually ignored in the past few years as credit been flung at us from all sides. In a rush to grab market share, lenders have forgone the rigorous credit analysis they used to do, relying more heavily on “credit score” for their decision-making. Now, with the credit marketing having dried up, those credit standards are likely to come back into play.

The credit standards are referred to as the 5 C’s of Credit: character, capacity, credit history, capital and collateral.

Character shows on your credit history in terms of your willingness to accept responsibility for making your payments on time. Skip a couple of payments, or make ‘em late, and you’re showing yourself to be of low character. Taking on too much credit also reflects on your character, as does moving around too much, changing jobs frequently, and why you’re choosing to borrow.

Capacity is your ability to repay the loan. Your income, how long you’re choosing to take to repay the loan, and your familial responsibilities all play into your capacity. Debt service ratio is the calculation most often used to test your capacity.

Credit History: You know the old saying, “History has a way of repeating itself”? Well, lenders know this to be true. Your credit history provides a snapshot of how you’ve handled debt in the past, and is a big influence on a lender’s willingness to “take a chance on you.”

Capital refers to what your balance sheet looks like. If you haven’t built up any equity – be it in a home, in a retirement plan or in a savings account – then you’re not likely to score high on the Capital scale. And if you’ve taken on loads of debt, that hugely offsets your assets, reducing your Capital Score.

Collateral is what you may offer to offset the risk of you defaulting on the loan. If you have a home and take a mortgage, the property itself is the collateral, which is why mortgage rates are usually much lower than all other forms of borrowing. Car loans should also be less expensive for much the same reason. However, I’ve seen people paying upwards of 28% interest on car loans, which means that everything else on their 5 Cs must really suck.

It’s more important than ever to understand, monitor, and manage your money if you’re in the market to borrow. And don’t think that just because you have a pristine credit record that it’ll continue to be cheap money. Nope. You can count on the cost of borrowing to go up. According to the New York Times, “Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders.”