August 2009 Questions & Answers

 

 


Hello Gail!
I have a question about paying down my mortgage. I am 29 years old and I have no personal loans or credit card debt and owe only on my car loan and home. My home is a line of credit mortgage with an interest rate that fluctuates with prime. Recently this rate dropped down to 3.5% and I am allowed to pay it off at any time or amount I choose. This can be useful for saving money and paying it out early or detrimental if I spend all my income in a month and don't apply anything to the principal. I have had this mortgage going on 6 years now. I have $2000.00/month that I can afford to divide between the mortgage and savings each month.

My question is which is a better way to go? I can't figure out if getting rid of the debt is the better way to go, especially now that the interest has dropped or to apply more to savings. I currently pay 1500 towards the debt and 500 into savings and hope to be home free in 10-12 years and then will up the savings at that point. However my husband thinks it may be better to lower the amount we pay the debt down and increase the savings, taking longer to pay down the house. I also can't decide if it would be better to apply everything we can onto the debt and then in 7-8 years continue our savings. We have been investing for 10 years into mutual funds that are down now but we are young enough to wait out the storm. So what's the solution?? All I do is look at numbers these last few weeks and I can't make heads or tails over what may be the best choice for me?
REALLY hoping to hear from you!!! Thanks so much,

Name Withheld

Saving is as important as mortgage repayment for two reasons:

  1. the time you have to make your money grow is very important for compounding, and
  2. having some money set aside just in case is what saves your butt when the caca hits the fan.

Sooooo.... if it were my decision to make, I would:

  1. make sure I had at least six months' worth of essential expenses covered,
  2. make sure I was maximizing my RRSP,
  3. make sure I had enough insurance to deal with any unfortunate crap that came along,
  4. have some fun
  5. pay off the mortgage.

A life that is fully focused on debt elimination without any balance may create a rebound effect. The mortgage, while a big expense, is manageable.

If you've got a-d covered, then go ahead and slap all you want into the mortgage. Good for you.

 

Hi Gail,
I am a first year graduate student (Ph.D.) who has managed to get this far without any debt. However, since beginning my program, I have begun living paycheck to paycheck and have begun to rely on my credit card to make for the lack of funds in my bank account. By contract, I am not allowed to take on a second job but, due to the high costs of rent and limited funding packages, I have begun to rack up debt that I am worried I cannot pay back on schedule. Do you have any suggestions of how I can get back on track?

Name Withheld

In  the best of all worlds, you'd have done some planning and had some money set aside to see you through this period. If you cannot take on a second job, the only way to manage this is to:

  1. cut your spending to the bone, 
  2. figure out how much you MUST go over every month, and how much in debt you'll be when it's all said and done, and
  3. find the cheapest form of credit so you rack up the lowest amount of interest possible. 

You will not have the luxury of beer and babes. You'll have to eat cheap food, find a cheap place to live, and bust your butt to get done as fast as possible so you don't end up with student debt that looks like a mortgage. That being said, you've done very well so far, and you should be very proud of what you've accomplished. When the going gets tough...as it has right now, it's important that you stay focused on your goal, minimize the downsides and stay in your groove.


 

Hi Gail, I'm a postgraduate student and I graduate this June and I’ll have debt of $25,000 for a line of credit.  After that, I'm going overseas to do some volunteer work and to visit my elderly grandmother. I want to start working as soon as I get back to Toronto so that I can start paying down my debt ().   Where do I begin?  I pay $1130 in rent a month and I want to be debt-free as soon as possible,  My question is: how do I pay down my debt and still have a life?

Name Withheld

Paying down debt requires that you prioritize the things that are most important and focus on those, while you put your nose to the grindstone and work hard to eliminate the debt. The fact that you have the luxury to travel right after school means you already know about focusing on more than the money. But the money is important too. You have to decide how long you want to take to pay off the debt, and then stick to your plan. If you decide, for example, to take 5 years to repay your school debt, you can expect to pay about $530 a month towards your debt (ball park). If you take longer than 5 years, you have to weigh the overall cost of the loan (it'll have already cost you almost $7,000 in interest) against whatever you derive by postponing repayment.
This is all about making choices and focusing on goals.

 

Over the last 8 years I have "racked" up two of my Credit cards. My employment is seasonal and in the off season I have tried to work but the wages were less than my employment insurance.

I am now in the situation of facing debt collectors. Having this type of  employment, I can’t seem to find anyone to give me advice other than to submit bankruptcy! Which is something I really don’t want to do. I have inquired into debt repayment programs, but because of my "employment situation" the feedback has not been positive. I have tried to make payments when possible, but interest is killing me.

I am at my wits end, I don’t know where to go to next or if I have any options! Suggestions?  

Name Withheld

At some point we must pay for our mistakes, and it sounds like you've hit the wall. Sadly, when the resources aren't available to fix the problem, then bankruptcy may be the only option. Yes, you will muck up your credit history for about 7 years, and the credit world will treat you like a pariah, but what option do you have? If you don't have the money, you don't have the money. And if you can't find work, well, you don't have the money. Peoples circumstances change all the time, which is why I encourage people not to get into debt -- or to get out as fast as possible. No one knows what's around the next corner. Having debt means having fewer options.

 

You usually help couples who are in trouble with debt but my problem is a little different.  I've seen you on the show Till Debt Do Us Part, well my wife is the exact opposite of that to the point where she acts like we have money problems but in reality they don't exist.  1st here's a little background, it's just me and her (no kids) and it's going to be that way for awhile, we own a condo with NO MORTGAGE, $0 credit card Debt, I make over $80,000 a year, each month I save at least 60% of my paycheque and my investment portfolio each year brings in at least 5 figures.

Despite all of these things every time I buy a cup of coffee that costs $1.25 she gets on my case of how expensive it is or whenever I buy something like a newspaper to read she complains how I'm wasting money. Bottom line is she acts like we're in the poor house when we're far from it.  My question is how do I get my wife to ease up and enjoy our money?  The way I see it we can afford to enjoy our money a bit. 
 
Name Withheld

While your wife is in the minority, she's not alone. And it is hard to live with. What I suggest is that you practice spending money and having fun... starting really, really small. If she won't budge in her austerity, then you're going to have to find a way to not let it affect you. So work into your budget an "allowance" that either of you can spend in any way you want. Let's say $200 a month. No questions asked. The catch is if one person doesn't spend their allowance to have fun and bring enjoyment, they lose it to the other person the following month. So if she doesn't use her money for her own or your joint pleasure, next month she gets 0 and you get $400. It then reverts back to $200 each. Give it a try and let me know how it works.

 

Dear Gail, My b/f has not paid his taxes for over 4 yrs and finally the government came to me to get to him. They caught up with him and they said if he filed they would only go back 4yrs and they did.

He got their report back now and it says he owes $30,000 and he'll be penalized if he doesn't pay in full well he can't afford to pay in full he doesn't even have a bank account. Yes I know at 30 you'd think he would have his finances figured out. I was hoping to go on your show Till Debt Due us Part but we are here in Vancouver, B.C. Anyways, we have started a family and I really need his taxes to be taken care of or start on a payment plan or something ... I think he's just acting like it's not there because he has no idea where to start or how to fix this tax situation. Please if you could help us with where do we begin. Thank You.  

Kristen

I do not have an easy answer for you Kristen. He owes. they'll collect one way or another. If you're in the way, you'll get run over. Make sure you keep your money separate from his -- no joint account -- since the tax man has the right to take anything he wants and won't discriminate what's yours from what's his.


My husband and I desperately love our first house but we needed more space as my stepchildren came to live with us and we have one child together with a second on the way.  The bank allowed us to refinance our home in order to buy a second home and we currently rent our first home.  But, a year later I am worried about our decision.  We now have $600,000 mortgage debt over 40 years to pay off and our housing costs are 53% of our income.  We don't have any other debt, no car finance, line of credit or credit card debt.  We have no savings for retirement ( we are 31 and 41 years old). I will be on maternity leave shortly and I am also a part-time student (no debt as of yet as we have paid for my courses bit by bit over the last three years).  I think we would have been better off selling our first house (but we plan to move back there in several years).  With house prices dropping in the economy crunch we would now lose money on the house.  Do we just sit it out and hope house prices improve again?  Or do you think we should sell one of our houses?  The rent just covers the mortgage payment.  Thank you in advance.  

Name withheld

The tough economy makes everyone second-guess themselves. I don't have enough info to guide you specifically so I say that, in general, if the house is carrying itself (the rent you receive covers the costs) then you should be alright assuming you haven't now taken on a home that is more than you can afford. You are spending a huge amount of your income on housing, but you have no other debt so you actually could pull this off if all your other costs are in line. Make sure that you have a good emergency fund so if the rental goes unrented for a couple of months, it doesn't kill you.


Is it reasonable to have a working, well paid professional adult child living at home rent free?
If so, for how long? If not, when should the child pay reasonable room and board? Thanks,

Name withheld

Are you kidding me? Rent free? It's never okay since the "child" isn't pulling his/her own weight. She or he should be contributing 35% of his or her income to the family coffers. It's one thing when parents want to help kids in distress. It's another thing completely to become an enabler to a child's self-indulgence. 


Dear Gail, First I want to congrats for your program and tips of how to get out of debt. Our story is kind of different. My wife and I moved from Mexico to Canada almost 8 years ago. The process to immigrate is very hard, and you never ready to face different challenges specially in terms of money.

We have a debt or $25K in a credit line and little over 2K on our shared credit card. We really need a help of how to manage and get off of this debt. Currently only my wife is working and her income is just enough to cover rent and groceries. We have a little baby girl who is two years old.

For the last 9 months, I have to take care of her because of the limited spaces and availabilities for daycare in Canada, this has been a challenge on my work search and, trying to get a part time job I get the overqualified answer. We will appreciate your tips and comments. Sincerely,

Alejandro

Alejandro, I know coming to a new country is difficult, but you both have to decide what you really want to achieve... not just what you think you want... what you really want. You both could still be working, even with a little one to take care of. Lots of families work "opposite" shifts. One works the day the other works the night, so there's always someone with the baby. You must find a way to make the money to get the debt paid off and get on your feet. You can do it. No one else can do it for you.


Gail! I have a friend at work and she and her husband are MAJORLY in debt...might be in the neighbourhood of $250k and consists of numerous credit engines...the main issues (in my opinion) are these: they are both shopoholics, they talk each other into everything, they are both easily talked into something, they think a designer bag is "cheap" if it is 50% off - even if it is still $150. They take a ton of "cheap" vacations, they eat out multiple times a week (often twice in a day), they drink specialty coffee and drinks, they buy what I call "designer" food - lamb, market veggies, fresh cut meat, prepared food, they act WAY richer than they are.  I keep thinking of more things...they take cash advances on credit cards. I think they even took $4000 cash advance to make the down payment on their Mazda cx7 which they lease.

I would say their combined income is just over 100k and they have a large mortgage on a home...however they act like they make 500k+ and can afford expensive dinners, trips and designer things (she probably has 6 coach bags!!!!). They buy top of the line things and their house is FULL.

By looking at your website I can see that they need to pay it off in 36 months. The only way I can see that they would EVER do that is by SELLING a lot. Likely even their house...I think it's a 30+ year mortgage.

How could they even start? Did I mention they are both extremely obese? Life is OUT OF CONTROL and I know she really wants to be able to have children and afford them.

Maybe you should come to Calgary to tackle these crazy credit crunchers on your show!????? I've seen how tough you get and they need someone to push them into REAL life and make them realize the trouble that they in.

Honestly if you don't come...they will likely just keep waiting to win the lottery...and I'm sure you've heard that one before.

Name withheld

Sadly, there are people in the world that cannot see the consequences of their actions. They will first have to lose everything to see that their lifestyle choices have not been good ones. BTW: the reason the show doesn't travel is because I must visit with each family 4 times in a month, and I have a fam of my own to care for... so I can't be away for a whole month at a time. The travel costs make commuting impossible.


Hi Gail:
Thanks for your show, not only do I enjoy it and learn from it but my two teenaged daughters are learning from it as well so will be able to start their adult lives with good money habits.  

I am going to receive $15,000 from my previous employer.  I have been on working part time and on EI since Oct 2008 while a decision was made by the union.  Thanks to you and the fact that I got a second job to help pay more bills, I had a part time job for this time.  It was not enough to keep up with our  bills, so our credit cards are maxed out again. We had our daughter in a medical program in the states for two months which we had to put on two of the cards.  So my question is with 4 credit cards with a total of $27,000 should I take the money as a lump sum put it on the cards or put it straight into an RRSP so save tax???  How could I structure the payment for best results?  Thanks

Name withheld

This is actually a very hard question to answer without the specifics like interest rates, marginal tax rates and the like. In general, it is always wise to roll money that can go to an RRSP into an RRSP to mitigate taxes. So the big question becomes this: do you have the cash flow to get that $27K in debt paid off in under three years. If yes, do it that way... working like a beast to get the debt gone so you reduce the interest costs as much as possible. If not, then you'll need to see someone who can work out the tax liability if you do not put the money into an RRSP. Tough spot.

 

Gail, I really value your opinion. I will be graduating from post-secondary soon with a student debt of around $7000. My boyfriend and I have so many things to save for we don't know how to go about it. We are young, 25, and I want to start saving for retirement, but we need to save for a down payment on a house, a wedding at some point, and other things like furniture, a car etc. Together we make about $80 000 a year, and I will be aggressively paying down my student loan soon but with so much to save for, how do we prioritize?

Name withheld

What a good question. Hmmm. How to prioritize. Well, let's see if we can put some perspective on this. First, since you gave me your joint income, I'll deal with the money jointly.

Since you are both quite young, you can save for retirement without dinging your budget really hard. Can you manage $300 a month between you? So that would be $150 each into an RRSP. You also need an emergency fund, so do the same again but to a Tax Free Savings Account (one in each name). Okay, that takes care of saving.

On to debt repayment. $7,000 isn't a humongous amount of debt. At 5% interest, it will cost you about $30 a month in interest. To have it paid off in two  years, you'd need to repay about $292 a month in principal, for a total monthly payment of $322. Can you swing that?

Okay, so you want to set aside some money for some big purchases like a wedding. This is called "planned spending" as opposed to "savings" since you're planning to spend the money. All you have to do is set a total goal and divide it by the number of months before you use the money. So, for example, if you want to spend $15,000 on your wedding and you want to get married in 2 years (24 months), you'd divide $15,000 by 24 to come up with $625 which is how much you'd have to save every month to meet your goal. 

Only you can decide what your big goals are, and you may have to prioritize one over the other. So if you decide that you'll forgo a fancy schmancy wedding in favour of having a big honking downpayment for a home, then not only would you get a cheer from me, you'd probably hit your home-ownership goal faster!


I have a bit of a spending habit. We live in the middle of nowhere. So when I go to the city it is lots of money. I cannot go anywhere without buying crap for my kids. I find that when I am having troubles in my marriage (e.g. this past 18 months) I tend to fill that void with shopping, trying to fill a void... I managed for 4 years with no credit cards and still had a savings account, but now I  have three credit cards and not a lot in the savings account... HELP ME PLEASE!!!!

Name withheld

My heart goes out to you. I know that when things aren't going well, shopping may be the only "hit" of pleasure our brains get. But it's a very destructive way to fill the void. You need to:

a) cut up the credit cards so you can't use them,
b) make a budget that includes some mad money for when you get to town, and that's all the cash you take, and
c) deal with your crappy relationship.

Nothing is going to fix itself. This is your one life girl, and you can live it like a yo-yo, or figure out what you really want and make that happen. You are the person who is in charge of your life. You get to decide what it looks like.


Dear Gail, We have 46,000$ on a home equity line of credit, a 224,000$ Mortgage, 5,000$ student loan and 12,000$ in credit card debt. My husband has about 30,000$ in RRSP and my girls (3 and 5 years old) have 7,000$ in RESP. We have a combined yearly income of 120,000$, but really live paycheck to paycheck and are often short a few hundred dollars every month. We own one car and lease the other, and finally we don't really have an emergency savings account.

My husband recently received a 50,000$ inheritance and decided to put it away in a Mutual Fund Savings Account reserved for our daughters education. I argued that maybe we should pay off some debt first.

What do you recommend we do with that money? Thank you so much.

Anita

Anita, it was his inheritance and he should do with it as he wishes. However, my first choice would have been the credit card debt and then the home equity debt. That being said, you people clearly have a big leak somewhere because if you're making $120K and still running up debt, your spending is a little wonky... so the budget is the place to start. I suggest you get serious about managing your money, get on a debt repayment plan that will get you out of debt in 3 years or less. that's what you'd have had to do if he hadn't gotten the inheritance. You made a mess. Now clean it up.

 

I am self employed and pay my taxes by instalment payments. This question is basically about how to organize accounts/"savings". We currently have a chequing account out of which we pay all of our fixed expenses and a savings account out of which we pay all of our variable expenses.  Because I have to set aside my own tax money, I set aside 30%of each paycheque into a money market account.  Then our "emergency fund" is where the rest of the money goes (in a T-bill acct)  In my budget, we are setting aside a certain amount for:

  1. Licensing fees
  2. Continuing education
  3. Car maintenance
  4. Gifts
  5. Clothing
  6. Vacation
  7. Home improvement/maintenance

However, this allocation is great in theory, but it's all sitting in one big pot and therefore difficult to keep track of what's been spent on what.  How would you suggest keeping track of the money allocated for all of these purposes?  It seems crazy to have that many accounts, doesn't it??  And if the amounts of money are somewhat substantial and may sit for months at a time, it doesn't really make sense to have it in "jars".  How should we organize things??  Thanks!!   

Sarah

Sarah, here's how I do it:

  1. I have a transaction account (chequing) out of which I pay all my bills. Any money I know I'm going to spend in a month stays in this account.
  2. I have an RRSP to which I transfer money for long term savings.
  3. I have a Tax Free Savings Account to which I transfer money monthly for emergencies.
  4. I have "savings" accounts set up at ING Direct... I have a "home maintenance" account and an "overflow" account.

Every month, the money that I know I'm not going to spend -- money for home maintenance, property taxes, house insurance, clothing, gifts, medical all get transferred to my ING accounts. I could have a separate account set up for each (ING doesn't care and even lets you "nickname" your accounts so they're easy to keep track of) but I simply track what I have on an excel spread sheet. When I need to spend money -- I'm just having my roof done -- I transfer the money I'll need back to my transaction account so I can spend it.