April 2009 Questions & Answers

 

 


Hi Gail. You were on the CFRB 1010 show today and I was able to ask a question about whether I should put money towards the tax-free savings or my student loan. The answer I received was great but I have more. I currently have no insurance and my current job does not offer any RRSP contribution. I have a regular savings account for emergencies, the tax-free for anything else and I pay double the amount on my student loan monthly. At this rate, I calculated that I should be done paying it off within 4 years. I live at home rent-free. I was wondering how I can go about saving for my RRSP and if I should purchase insurance. Please help! 

Esther     
 

Esther, transfer the money you have in a savings account to your TFSA (up to the $5,000 annual limit) and continue making contributions of at least 100 a month, more if you can afford it. The rest of your savings should go into an RRSP. How you invest that money will depend on how knowledgeable an investor you are. If you're not, learn about "passive" investing which includes "buying the index". You can start your search on Google using those terms.

 

Hi Gail Love your show! Thanks for some honest and long overdue advice. I have set up our jars and am finding that I have money left over in our Entertainment and Clothing/Gift jars. Since some weeks we may not have any expenses under these categories and other weeks we may have a lot (we have two teenage kids), what do you suggest we do with the excess at the end of the week? Should we deposit in an account... Thanks

Sheryl

Sheryl, I keep all the money I don't spend in an ING "budgeted but not spent" account. Then, when I need it, I put it back into the budget and track how I've spent it.


 

Hi Gail!! Love your show!! My question to you is about the home I bought almost 3 yrs ago. It is a Manufactured home. It's in a very nice park, but the land however is on a "land lease". We have to pay a pad rent every month. My husband and I are looking at buying a house closer to work. We are not sure if we should stay here and be mortgage free by the time we retire, or have a higher mortgage and possibly not have it paid off by the time we retire? I know a house is a better real estate investment than a manufactured home on land we don't own. We figured after 25 yrs of pad rent we will have paid out over $100,000. Our mortgage now is around $167,000 but if we buy a house we are looking at a mortgage of $314,000. Without paying a pad rental, buying the house with a higher mortgage is only $143.00 more a month with the property taxes included. What would you do?? We finally have found each other and are starting over in our mid forties after both of us went through terrible divorces. We could use some advice. Thank you very much for your time!

Name withheld

You seem to have answered your own question. Your points:

house closer to work
house is a better real estate investment
$100,000 in land lease fees in 25 years
$143+ a month more a month to have the house

If you can afford the $143 a month, then you already know the answer. As for being mortgage free by the time you retire, you can still accomplish that by using smart strategies such as an accelerated payment, or saving up small amounts during the year and making a prepayment.

 

Hi, Have been playing around with your Build a Budget that works format and I have a few questions: First of all I work for the provincial government and I travel lots and lots,,, there are quite a few incurred expenses with this travel that mostly gets paid back but that also builds up interest on my VISA...we don't know where we should add some of these expenses,,, ie rental cars, copious amounts of gas, hotels, loads of restaurant bills etc...makes our expenses look out of whack when really I am getting paid back for it but not totally...the other problem is that while I am incurring these expenses and before the government pays me back I am either using my VISA or my checking account to pay for my expenses which leaves me less income to pay for the other things i need to pay for i.e. bills, groceries, which cause us to use the VISA for those things like groceries etc...the third issue is that my husband just lost his job to his company's closure and he is now working for 15,000.00 less per annum then before but we still have the same debts...and live in a fairly rural area... I changed jobs for a better salary but lots more travel expenses etc... HELP! is there anything you suggest for any of these issue? like this week I have to purchase a plane ticket for Ottawa for work but I don't have cash or room on the VISA to do it! thanks for this

Name withheld

What I usually recommend for people who have to incur biz expenses for which they are then reimbursed is that you set up a separate pool of money (a jar, an account, whatever works for you) where you cycle the expenses and reimbursements through so they don't affect your ongoing budget. If you must use a credit card (as you must for hotels and travel), then you get a separate card for this purpose alone, and you never carry a balance on this card. Your employer must return the money to you in a timely enough fashion that you don't have to incur interest costs. Since your dh is now bringing home less, you're probably struggling as it is to make ends meet and wonder where in heaven you'd find the extra money to fund this pool. Good question. Do you have anything hanging around that you're not using that by selling would help create the pool? Can you or your honey take on some extra work to build this pool of money? Only you can come up with the solution to this problem. You also need to get out of debt. I know, I know, you hear this all the time. But you do. It doesn't matter how hard it is, how hard you have to work, or what kind of work you have to do, getting rid of the debt must be a priority.

 

Hello Gail, Thank you so much for your program, I truly love it and enjoy the lesson every time I watch it. I have now also started watching with my 15yr old daughter, I believe this is a life lesson for the both of us. My question is, how do you know when it is too late to get yourself out of the debt hole???? Thank you so much, and I look forward to hearing from you at your earliest convenience. Bye for now 

Name withheld      

I assume you're asking me how to tell if it's time to declare personal bankruptcy, since it's never too late to get out of debt. The short answer is... if you cannot make your debt repayments (to be out of debt in 3 years or less) and keep a roof over your head and food in your stomach, it's time to visit a bankruptcy trustee.

 

Hi Gail, ummm this is something that is bothering me, I am blown away by the fact that you chose to give your help, advise, tough love and so on for FREE!! In these troubled times with everyone trying to make a buck, why do you do this for free online?..Grateful...YES! as I am one of those people who could not of been able to access your help had it not been free. People who care are far and few these days and to find out about the work you do was very overwhelming for me. I have downloaded your budget spread sheet, which neatly did all the math for me and I am so excited to start this Feb 1 2009! I am going to the dollar store tomorrow to buy my jars and lables! I myself have in the past did a consumer proposal taking 5 yrs to repay and I completed it on my own but it was very ruff, wish I'd of had this back then!! My husband filed bankruptcy before we met and married which was over when we married but now the rule of thumb is NO CREDIT of any kind allowed for either of us!! I just see the financial potential in your work, you could easily be charging for all this work you do!! But you don't and for this act of kindness I say THANK-YOU GAIL!!

Sincerely Tammy-Lynn, Ontario where times are tough and money is tight but follow Gail’s rules and it'll be alright...;

Tammy, I'm glad you're working your way back to financially healthy. I do this for free for two simple reasons:

1. People need it,
2. The people who need it are all broke and couldn't afford me.


Hello Gail, Love your show.  I have been watching now for about 3 months, a lot of reruns though every day.  My wife and I are living with the jars now and have been doing good with it so far.  As of June we will be out of debt except for my wife's School Loans and the mortgage.  What I am mostly curious on is some calculations which have been made on your shows.  The most recent one I caught on TV was the "Wed Now, Pay Later" episode.  In it you stated that the couple had about $30,000 consumer debt and that they would be out of debt in a year by paying $900 per month.  My wife's school loans are $20,000 and I would love to have them paid off in a year, but I'm not sure how to.  Currently I am paying $625 per month towards the debt to have it paid off by the end of May and I was going to put that towards her loan.  Could you help  me with the calculations that you made to help out the couple on that episode so that we could pay the loan off ASAP that would be great thanks.

Name withheld      

Get out your calculator.

First you have to decide by when you want to have the debt repaid. If you decide to take 36 months (the max I recommend) then you take your total owed - let's say it's $2,500 - and divide it by 36. The answer: $69.44. That's how much you have to pay off the principal every month to get out of debt in 36 months. You also have to pay the interest cost. On that $2,500 at 11.25%, your interest cost will be (2,500 x 11.25 / 100 / 12) $23.44. So if you make a payment of ($69.44 + 23.44) $92.88 a month, you'll be back in the black in just under 3 years. And it will have cost you $395 in interest. The less time you take to pay off the debt, the higher your payments will be, but the less interest you'll pay overall. If you look at the payment amount and it seems you could manage more, then do more.


Hi Gail,
I am a huge fan and thought my husband and I were doing so well until I took a look at reality. My husband and I are 30 and 27. We have 3 children all under the age of 5 and it seemed that we were doing really well considering we have a nice house, and 2 vehicles that are both paid off. Last year we converted our mortgage into a LOC in order to reduce our payments and get further ahead.  Then our financial advisor suggested RRSP loans to help us start saving for our future, now we have 2 RRSP loans one for 35000.00 added to our LOC at an interest rate of 3.5% and a 20000.00 loan at 8.5%. It helped us as far as my Child tax b/c now I bring in 766.00 as opposed to 180.00 but  our total debt adds up to 278,000.00 including our house. I make sure to pay as much as I can every month on to our LOC but I still feel sick. Our min. payment on our LOC is 825.00 and I try as much as possible to put at least 1200.00 and any other money we come into on it as well. I have no choice but to stay at home with our kids as getting a job would make no sense considering my commute and  child care would bring nothing to the table. My husband has been trying to find extra carpentry jobs but with the economy he isn't finding a lot. Should I be freaking out? There is no way that we can pay all of this debt in 3 years...What do we do? Should we try to roll it into a mortgage. Are we doing really bad, I feel like such a failure. We have been implementing your jars but still can't seem to get ahead and my husband and I really aren't big shoppers. PLEASE HELP!!

Marlaina     

Marlaina, what would I do if this were my dilemma?

First, I'd go find another institution to deal with, one that values my financial health a little more, and is willing to help me achieve MY goals.

Then I would roll all the debt into a mortgage and get those payments in line with my cash flow so I could sleep at night. My budget would include money for on-going emergency and RRSP savings.

Finally, I'd find a way to make some extra money to build up annual prepayments against the mortgage to offset the interest on those old catch-up loans. It may take until the kids are in school full time before there'll be enough time to make this a reality, but with some focused effort, a $278,000 mortgage can be whittled away by steady annual prepayments.

The biggest thing is to get the whole plan back into balance. Saving for the long term isn't magic, it's discipline and it takes time. Taking on too much debt for the sake of some other objective is a sure way to crap your cash flow and rob you of sleep.


Hi Gail, I need some advice on whether to save for a downpayment or pay off my student loans. I work in a well-paying job and have for the past year. I graduated in 2005 and unfortunately up until 2008 I was not making a lot of money and went into a lot of credit card debt and I am still trying to dig my way out from underneath it. I took out a loan from my brother to pay off my credit card debt and have a payment arrangement worked out with him to pay him $2250 two times a year for 4 years. I have about $4000 owing on a line of credit and $9850 left on my student loans. I have $6100 in savings and have a great pension plan and contribute to RRSP's monthly as well.

My monthly bills are $1650 a month (not including student loan payments of $350) and I net about $3900 a month. I currently rent (my rent is $475 a month). If I would have been thinking over the last year, I would have already started tackling my debt issues, however, I was happy to finally start making ends meet and found myself in even more debt because of an online shopping addiction and some unexpected expenses along the way.

I have recently talked to my employer and hope to be transferred to the city I grew up in about a year from now. I would like to buy my own place when I move back and townhouses run about $220,000. Here is where I get confused, should I pay off my student loan as soon as possible, I figure I can have it paid off in 7 months (I can afford to pay $1200 a month and my employer will make a payment of $764 through a benefits account) and then start saving for a down payment. Should I use my savings and pay off my student loan asap (I hate the idea of losing my safety net however, finally having one for the first time). Or should I continue making minimal payments towards my loan ($350 will have me paid off in 3.5 years) and save the rest for a downpayment with the idea of having lower CMHC fees when I got to purchase a house?

From watching your show (which I adore!) and reading your webpage, I think your answer will be to pay off the loan (higher interest than my savings account), however, do I deplete the savings to do that even faster? And in the long run is it better to have less debt and a smaller downpayment when applying for a mortgage or is it better to have more debt and a larger downpayment for hopefully lower CMHC fees?

I would also appreciate if you would withhold my name. My mom is a banker who cuts your columns out of the paper and hangs them on my fridge when she comes to visit. I've tried seeking her advice a few times, but don't feel comfortable letting her know the true extent of my debt as it is rather embarrassing since it's been drilled into my head since I got my first credit card that the balance is to be paid off monthly.

Thank you,
Name withheld

I laughed when I read the part about your mom and the fridge. Aren't moms funny. And, BTW, you shouldn't ever be embarassed with your own mom. She did some pretty strange things to bring you into the world, and even if she gets mad, it's Love Mad! On to your question.

I would not touch the savings to pay off the debt since you need an emergency fund just in case, unless you have more saved than you would need to cover 6 months worth of essential emergency expenses.

Taking 3.5 years to get the student loan paid off isn't sooooo bad, but if your employer will kick in what is in essence two months worth of payments through a benefits plan, why wouldn't you go that route and get the free money?

As for saving for a downpayment vs paying off the student debt, in a perfect world you'd have the student debt paid off and 20% saved for a downpayment before you launched into home ownership. If you put $1200 away each month (once the student loans are gone) toward a downpayment, you'd be in your home in three years. You don't say how old you are, but I'll bet three years won't see you to your 30th birthday. Work harder, earn more, and you can shorten the time.

You want to avoid the CMHC fees if at all possible, because that just adds to the amount of your mortgage, and the amount of interest you end up paying over the life of the mortgage. Besides, home ownership is expensive.


My husband and I watch your show regularly, and it has helped us discuss money issues with each other much more easily. We agree on most things, thankfully, like not buying "stuff" unless we have the cash for it. Last week, though, we were talking about a hypothetical scenario and could not agree. My husband suggested I get your opinion, which goes to show how much we value your advice...

Here's the situation: If we wanted to buy a $2000 TV and had the cash for it, would it be better to pay for it immediately, or take advantage of a store promotion to not pay (with no interest) for six months and let that cash collect interest in a bank account for six months ? Would waiting for six months to pay it help our credit rating or it is not worth the hassle ?

No pressure, but we have agreed that your answer is going to settle this for us once and for all !  

Rana      

Rana: work out how much interest you'll earn on the $2,000 and then decide if that interest is worth the hassle of going through the BNPL process. For example, at 2.5% interest, you'll earn $25 on your money while it's in the bank. Is it worth $25 to you to BNPL. Keep in mind that if something comes up and you spend that $2,000 before you can use it for the TV, the interest rate on the BNPL is usually around 36%, and retroactive to the day you took the TV home.


I am married to a wonderful man who has three "grown" children. The eldest is 35 with two children (2 different mothers). The 2nd is 33 and has 6 kids with 3 different fathers and the 3rd is 21 and in college. The hitch comes in the fact that I bring home almost twice what my husband does. The youngest receives child support of $400/mth, plus we pay the lease on her car and her car insurance. She doesn't see why I keep nagging her to get a part time job. The eldest "borrows" but seldom repays. And the middle one - well what can I say. The queen of quilt. I would love to be able to paydown our credit cards, but I feel hamstrung, especially by the car and insurance that we pay for the youngest. When we got her the car, I was working two jobs (and her car was a death trap). She was going to be attending a college that was 1 1/2 hours from where her mother lived so would be traveling back and forth on weekends. Now, after 2 years of that course, she's decided to change her mind and her course, so has moved back home with her mother. I think she could now take the bus, as she doesn't need the car for transportation, but she thinks that if we get rid of the car, we should by her another one! I think she needs to get a part time job. I know we can't do anything about paying the child support. As long as she goes to school - the payments continue. I am at my wits end. Any suggestions.

Wendy

Wendy, You have some choices. You can separate your money, each sharing half the common expenses, which would mean if he wanted to give his children money, it would have to come from his pool of money. Then you could focus on getting the debt paid off. And/or you could have a conversation with your husband and explain your growing resentment, and the fact that it's time for the kids to stand on their own two feet. (I don't hold out much hope for you convincing him, however. Since I'm also a parent, I know just what suckers we are when it comes to our babies.)

 

Hi Gail - My partner and I aim to buy a home in the next year, or 18 months. We managed to save over $30,000 this year and expect to save another $5000 this year. We hope this is enough for a DP for a home (probably looking around $250-300).

I won't be paying tax this year thanks to rolled-over student tax credits, but my partner earned an extra $30,000 through contract work that hasn't yet been taxed - in addition to his regular salary of $80,000 (gross). We don't want to pay tax on this income. One possible option is to invest $30,000 in RRSPs (we have saved nothing yet in RRSPs so we have a big contribution limit). Then we would like to use the Home Buyer's Plan to turn that into a down payment. This seems like a good option for us since it would reduce (or perhaps even eliminate) our need to pay taxes this year, and it would also allow us to pursue our home-ownership goal.

My question is - do you have any thoughts on the Home Buyers Plan of using RRSPs towards a downpayment without penalty for first time buyers?

Name withheld

I think you've got a good plan since, in this case, you're using the RSP specifically for the HBP. I have a problem only when people say they're saving for the long term and then pull the money out for a house. You're straight-up about your purpose and beating the tax man to boot. You go girl. Don't forget you have to put the money back at 1/15 a year over 15 years or you'll have to claim the money as income. And you both should start using an RSP for the long-term as soon as you can to put time on your side.