August 2008 Questions & Answers

 


Thank you so much for your amazing show. We are using your plan and it is working great. I have been reading about a "mortgage crushing plan" called the Financial Equalization Plan and was wondering if you knew anything about it good or bad? Thank you.

Christie    
    

I wasn’t familiar with the plan you asked about so I had a look around on the web. It looks like a load of bafflegab to me. The language is neither plain nor clear, and the claims are quite imaginative. No strategies are described, just outcomes, which makes me nervous.

The best route for dealing with debt – any debt – doesn’t require a plan with a fancy name. If you want to CRUSH YOUR DEBT:

  1. reduce your interest costs as much as possible,
  2. maximize the amount you’re paying on your debt to get the debt paid off as fast as possible,
  3. pay off your most expensive debt first, and don’t become complacent about your less expensive debt; work hard to pay it off fast too.

 

You often quote things like "save just $550 per month and in 20 years you'll have $990,000". Unless my math is way off, you're counting on an annual return of about 15%. Please, tell me, where can I reliably get a 15% annual return!

Bill      
  

When I quote the growth of assets on the show, it assumes a rate of return of just 7%. The funds are in an RRSP, and any tax benefit is reinvested every year to grow the contribution. I’ve talked about this as a strategy several times, but we can’t cover it in every show since we have only 21 minutes to tell the story.

 

On a recent show, you mentioned that 35% of your budget should go to fixed living costs? Is that right? What costs make up the 35%? Can you please provide the list again? Great show thanks!

Patrick    
    

The 35% applies to “housing”, Patrick, not fixed costs. Housing is comprised of your mortgage/rent, property taxes and condo fees, home insurance, heating, electricity, and home maintenance.  Go check out my Interactive Budget Worksheet for all the info you need.

 

In the episode I watched tonight you suggested the couple have their debt consolidated into their mortgage. When is this best to do? For only very large debts? We have a line of credit and it would work out to be less a month on our mortgage than we pay in interest. Is this a good way to pay off debt?

Name withheld     
   

This is a tricky question because lots of people use the consolidation tactic to free up money so they can keep shopping. However, if you are serious about debt repayment and are looking for a way to reduce your interest cost and manage your cash flow, then consolidating to your mortgage makes good sense, particularly if you have lots of equity built up. The size of the debt itself isn’t the issue, though I wouldn’t recommend it for amounts under $25,000 since you should be able to pay that off, assuming you can get your interest costs in line.

Here’s the big BUT to using the consolidation strategy… you must be working at paying off the amount you consolidated to your mortgage as soon as possible. Whether you use your anniversary prepayment option to slap a whack of cash into your mortgage once a year, or you find a way to increase your mortgage payments, you need to actively work to pay off the debt.

 

Hi Gail! My mom is an avid reader of your site, and suggested I become one too. I've just finished university and have a student loan of $10,500 (quickly accruing interest). I am currently in the grace period until November 1st. My first payment is due on Nov. 30th. (Basically I don't have to make a payment, until Nov 30th, but interest still accrues).

This student loan is actually two (which I didn't know at the time). One is with Alberta Direct Lending for $6005.00 (interest rate is prime) and the other is with NCLSC for $4495.00 (interest rate is prime plus 2.5%). I also currently have approximately $4000 in credit card debt (interest rate is 11% with a $22/annual fee). I have created a budget, and decided I can put $500/month towards debt repayment (I'm also putting $300/month towards RRSP/Emergency/House Fund at $100 each category/month). I gross $37,500 year.. so i take home about $2000/month after taxes.

My question is what is the best plan of attack to pay off all the debt within 18 months? (my arbitrary goal), so that I can take the 500 and put it towards savings? Currently my plan is to put the full $500 (250 every two weeks corresponding with pay periods) on my credit card, until November 1st, and then re-direct the payments to the student loans. I was thinking $250 for each loan once a month, so 500 total a month to debt repayment. This is the best scenario I can think of - is there any guidance or suggestions you can give me? Thank you kindly!!

Jessie

Thanks for the details Jessie (people often don't tell me enough) and tell your mom I think she's very smart!

Now on to your question: How did you do in math at school Jessie? If you take a total debt of $10,500 and divide it by 18 (the number of months within which you want to pay this off), what do you get? I get $583.33, which is more than the $500 you've got allocated, and doesn't include the interest you'll have to pay.

Why don't you go to my Own Up to Your Debt worksheet and use that to help figure out how much you need to set aside.

If you want to do it the hard way, take your principal and multiply it by your interest rate and divide by 12. That's your monthly interest payment.

Then take your principal and divide it by the number of months within which you want to have it paid off. That's your monthly principal payment.

Add the amounts together. That's the amount you need to be putting toward your debt every month to meet your goal.

 

Recently, we found out that my husband's ex business partner used his name as a guarantor for some loans amounting to $50,000. The business went bust and he has moved to China. At the moment we are trying to pay our debts and this has happened. Also, trying to sell our property to pay everything. Please advise!!!

Name withheld     
   

Your ex-biz partner cannot have used your husband’s name as guarantor without his knowledge and signature. If the rascal did this, the lender would not be able to hold your husband accountable. If your husband signed for his partner, he’s a dope and you’re going to have to live with the consequences since you are legally on the hook.


I'm a single gal with an aggressive mortgage repayment plan (at least that's what my banking advisor calls it). My plan is to retire the day my mortgage is paid. On my budget it shows as a whopping 53% of my net income. However, I "only" have $1200 in personal debt. Am I making a mistake in applying so much toward my house? There's not much left for the "living" part of the budget.

Name withheld    
    

It’s great to have a goal, and a plan to reach that goal. Lots of people don’t. The plan needs to be sound, one that is attainable without making you crazy. If you have personal debt, then you may be strapping yourself too tight in your desire to achieve your goal. You won’t be the first person to have made this mistake. I’ve watched lots of people double their mortgage payments to get mortgage free, while racking up personal debt on their line of credit or credit card.

The other thing is if you’re so focused on paying off the mortgage that you leave no money for having some fun, are you having a life?


We have few credit cards and most of them aren't used most of the time. We mainly use 2 or 3 cards only just for the sake of point/mileage. As much as possible we pay in full whenever we can as we can't stand the interest rates. My question is: If we request to cancel the credit cards that aren't used often, will it lower our credit rating? If yes, how come? We are just trying to avoid debt and yet the credit score will be lowered. Please enlighten us. And we thank you for your sharing your knowledge on TV and online. More Power!

Name withheld     
   

The reason cancelling a credit card affects your credit rating is that when the card is cancelled the “history” for that card is closed off. Since you’re planning to close cards that have little or no history, you shouldn’t have any problem at all with your strategy.