February 2009 Questions & Answers

 


So now that we are in 2009, the TFSA is available. Should I contribute to the TFSA or my RRSP? Both myself and my husband have very good pension plans with the government (he's provincial and I'm federal) so I'm starting to think that saving in a RRSP is not the best plan. If I make the contribution to my RRSP, then I get a tax savings that I can use now, however I also have a higher income in retirement that I have to pay tax on later and potentially claw back of OAS. Since we both already have pension plans and over 100K in RRSP I wonder if we should stop contributing to them (we're in our 30's) and instead put our money into a TFSA. What do you think?

Name withheld       
 

I know I'm going to be getting this question a lot over the next few months. I would not stop contributing to an RRSP unless there is no real tax benefit because at your age you still have plenty of time for the compounding return to work on your behalf. You can use the tax savings to build your TFSA. You don't mention if you have an emergency fund, and a TFSA is perfect for this. As you get older (perhaps when you are less than 10 years from retirement), assuming you have a good emergency fund and you're still enjoying pension benefits, you can switch from the RRSP to the TFSA to continue building assets while reducing the tax implications at retirement.

 

We currently give our daughter an allowance in the amount of $0.50/year so our 10 year old gets $5/week. Up to this point, we have it broken down as $3.50 for spending, $1 for savings and $0.50 for charity. The purpose of the spending and charity money is obvious. My question, as well as her question, is...what is the purpose of the savings? Is it for a big purchase she may want to make in a year or two, for college, buying a car, house, retirement??? She has asked me what she is saving for and up to this point, I have answered that it is for college. Should it be for something not so long term? What is its best purpose? She has been very responsible with her money thus far and I want to be sure to guide her in the right direction with the correct answer.

Michelle

Michelle, I've told my kids that the can NEVER spend their savings unless a) they are destitute and need it to live or b) they have so much money it doesn't matter anymore. While it may be difficult to get kids to understand what loooooooong-term savings are, I find the explanation I've given Alex and Malcolm serves me well... it's money you do NOT spend.

As for saving for something specific, that's called Planned Spending. And you have to give up spending money on other stuff to accumulate the money you Plan to Spend on whatever it is you really want. That teaches how to prioritize and make choices.

And as for college, that too is a long term Planned Spending category, and she can put money aside too. But you may need to give her a bit more allowance to make all these lessons work. g

 

Ok Gail, we've successfully implemented the kids' allowances using the 3 jars (spending, sharing, & long term saving). Our 9 & 6 year olds just love it! Now the question is where should we put the "savings" portion? They only get a penny a month interest while it's sitting in our bank's savings account. Where's the best spot for these kids to leave their money for the next 10-15 years? Thanks!

Name withheld        

What a good question. Have you tried PC or ING?  Once my daughter had accumulated $1,000 we switched to using GICs. Eventually, when she goes to work, I'm going to have her put the money in her RRSP, and invest it as part of that long-term portfolio.

 

I've started with my money jars (envelopes), I'm wondering what do I do with the money I have left? Do I carry it over to the next week for just in case or do I put it on my debt? Or do I just put in a savings account? I know this isn't always going to be the case, but this week I do have money left. Thank you in advance.

Andrea        

Andrea, you should carry forward money left in the jars. Since there are weeks/months that are more expensive than others, having some money left over isn't unusual. And since it's natural to accumulate money for things like clothing, gifts and vehicle repair, having extra money when you need it means you don't have to steal from other jars.

 

Hi Gail,
My husband and I watch your show religiously! It's awesome! I have always been a saver but you have turned my husband into one!

We have both scored permanent jobs with the government and make combined $112,000 per year (By June'09 we will be up to $120,000 per year). We have a car loan (@ 1.9% will be paid off in 2013) which is about $500 per month and a 5 year consolidation loan of $300 (@ 11.5% which will be paid off in 2011). We have no credit card debt. We are currently renting a furnished condo from my parents and are able to live on my husband's salary and put mine in the bank (about $2400 per month).
My husband and I purchased our first home, (new construction) for about $315,000. By the time we move in August we will have saved up $70,000 (this includes our RRSPs ($24,000 - today's value; already saved and SAFE ie the interest is the only thing to fluctuate), the deposit ($18,000 we paid in cash when we decided on the house) , the rest is cash in our savings account we have $17,000 but need to save another $10 000).

We are also expecting our first child in August (when it rains it pours!). I will get my mat leave topped up to 93% of my salary for the full year.

So here is my question:
How do we distribute our savings when we buy the house?

If we put down the full 20% to avoid CHMC fees (20% of $315,000 is $63,000) it leaves us with only $7000 in cash to cover our closing costs, buy new appliances and furniture. (we are willing to take our time with the furniture i.e. save up and buy as we go but appliances are a must). Closing costs we are estimating are going to be between $5000 and $6000 and appliances are going to be about $4500.

Do we put down the full 20% down payment to avoid the CMHC fees? And then take about a small loan or line of credit to cover the amount we are lacking?

Or do we put down less and pay cash for our closing costs and appliances, but pay the CHMC fees?
Thanks for your help!

Name withheld        

You should avoid the CMHC fees. If you decide to go high ratio (your down payment is less than 20% of the purchase price of the home) your premium would be 1.75% and 2.75% of the total purchase price. So if you had 10% down, your premium would end up costing you ($315,000 x 2%) $6,300, which would be added  into your mortgage, so you wouldn’t feel the pain right away, but it would cost you long term. My recommendation would be to a) put a push on to come up with the extra money you need or b) hold off on purchasing some of the things you think you need until you have the money. You should also go read my series on home ownership.

 

We are a one income family; consumer debt of $12000 and mortgage of $90000; RRSP is approx $12000 with $200 per month being added.  My husband will be retirement age in 15 yrs.  We won't make it.  I know I will have to return to work but by that time rolls around, I will have been out of the work force for approx 15 yrs meaning I will qualify for minimum wage jobs only. (disabled child at home & live in rural community) how can we prepare for this when we are just surviving now?   

Connie        

Connie, you have 15 years to get yourself prepped for the job you will keep until you turn up your toes. You have 15 years to figure out what you can do to make money, get the training or education you need, build some experience (either volunteer or as a small biz) and prepare to take over the financial reins when hubby takes over the care giving for your child. And you have to also consider how that child will cope once you're both far and away.


Hi Gail: My husband and I enjoy your show tremendously. I think we are good savers and spend/save according to what we earn. My question is we owe $36,000 on our mortgage, we have roughly that in our savings, should we take all our savings out and pay off our mortgage or should we continue to pay our mortgage down on a biweekly accelerated basis as interest rates are low?

Name withheld

Do not take your savings and pay off your mortgage. I know the temptation to be "debt free" is strong, but you would be leaving yourself wide open by now having some money at the ready just in case. Stay the course with your accelerated mortgage payments. If you want to make a principal prepayment of $5,000 against the mortgage, that would be fine, providing it leaves you with enough to cover six months' worth of essential emergency expenses.


Hi! I am in the process of coming onto a budget and using the money jars and all, really looking forward to it. I just need to know: In what category does tobacco products fit into. (Besides nowhere). He's going to try the patches to quit but I need to know what cat. it goes into until then. Thank you

Betty

Put it in "entertainment"... when he figures out that it's a movie or a smoke, a dinner out or a smoke, a ball-game or a smoke, that should help him quit!


I am married with 2 young kids in daycare. We expect my husband as the lower earner will receive a 2008 income tax year return of around $4000 because of the child care expenses. We currently owe $19000 on a line of credit at 6% interest. We do not have additional debt other than our mortgage. We have some savings for planned expenses but no emergency fund. In 2008, we made RESP contributions for each child and RRSP contributions for me but no RRSP contributions for my husband as that didn't fit in the budget (still working on that!). My question is: should we take the $4000 and apply it to:

A) the line of credit debt
B) buying RRSPs for my husband
C) starting an emergency fund in a tax-free savings account

It would be great to find a solution that would hit more than one of these goals but I'm not that savvy yet! Thanks Gail!

Roxy

Roxy, use the tax refund to pay down the debt. Cut your budget back and use the money to start building an emergency fund monthly. Use a TFSA for this. As for RRSP contributions for your husband, that makes sense and is easy to do if you just auto-debit for $100 a month each month starting in January. Then in December you'll have contributed $1200. Want a larger contribution? Increase the monthly amount. If your family regularly gets a tax refund, you can get your employer to reduce your taxes at source. That applies for child care payments and RRSP contributions.


We have about $67,ooo in debt.  $30,000 is on line of credit and $37,000 is our cars. We just came into an inheritance of around $34,000. My husband wants to pay off the cars and then apply that money to the line of credit.  I am unsure of what would be the best use of the money, can you give me some advice.

Name withheld        

Your husband has the right idea. You should pay off the most expensive debt (the one with the highest interest rate) first, and then focus on the next-most-expensive until the money is gone.


I currently have a car loan with a fixed interest rate of 6.99%.  The balance left is a little over $5500 and I still have 22 payments left.  I also have a personal line of credit with a $0 balance that has a variable interest rate of prime + 2%.  Currently prime at my bank is 3.5% therefore the interest rate is 5.5%.  My question is should I pay off my car loan with my personal line of credit?

Name withheld       

It's great to see that you're thinking about how to reduce your costs. The question is are you prepared to convert a fix-rate loan (your current car loan) at 6.99% to a variable rate loan (your Line) at 5.5% and take the risk that over the next 22 months interest rates won't go up? If you are, then go ahead and pay off the car loan with your line. If not, stick with what you've got. I'm not going to try and predict where interest rates are going. You have to decide what you're comfortable with.  Keep in mind, if you do switch and keep the same payment amount, that debt will be gone before 22 months, because more will be going to the principal.

 

My husband and I are 28-29 yrs old. We recently sold our home so that we could return to school and pay as we go as well as pay off our school debt right away, or at least have a 'nest egg' to start over with. We have approx $35 000 in a savings account and will need $17 000 for school debt in the end (no more than that) and will need to use approx $8 000 for living . I'm very good with our money but we want to make the best decisions with this fresh start. Should we pay off our debt right after we're out of school (in a year) or have a plan to do it over a period of time in efforts to build our nest egg/emergency fund. This is the only debt we have. My husband will be carrying our expenses through the middle third of the year and I hope to work the summer to carry us through the last third of our year. We just need to use our savings (the $8000) for the first third). What are your suggestions? Thanks for any help you can give...great admirer of the show too!

Name withheld

When I add up what you're spending ($17K + $8K) I get $25K, which means you'll still have $10K in savings that you can use for emergencies. I would pay off the debt as soon as possible so you limit the interest you have to pay. Once the debt is gone, get busy rebuilding that nest-egg. By the way, congrats on planning so well for this.