January 2009 Questions & Answers

 

 


First, I LOVE YOUR SHOW!!! I have a house worth $310,000. I have debt of $12,000 credit cards etc. which are being paid down quite quickly. My concern is that a few years ago I was told to refinance my mortgage into a (HELOC) line of credit mortgage to pay off bills etc and to invest in a business. By the time this was all worked out I now have two mortgages one for $162,000 @ prime and one for $78,000 @ prime + 1% for a total of $240,000. so we are currently paying just interest until the debt is gone. What are your thoughts on line of credit mortgages. We are doing exactly what you say, we live on cash and use the jars and we write everything down, our income is $4,300.00/month clear. I am conflicted because I so desperately want to be out of debt (including mortgages) and with the economy I am concerned of interest rates going up and housing values falling. I would appreciate any direction you could give me on this. Thank you for this show it has really helped me getting my husband on board with budgeting although he hates it. I think what you do is so important, I personally know the conflict that money can bring to a marriage and really the family unit is so... important. Thanks again.

Kelly

Kelly, I'm sorry you were given bad advice and lead astray. Here's the problem: the line of credit interest rates can increase at any time. And since the point of the HELOC was to give you the flexibility to pay off as much as you wanted, but you're only paying your interest, you're worse off than with a traditional mortgage. If it were my decision, I'd go and get a traditional mortgage amortized over 25 years and if I had extra money to pay it down, I'd use the principal prepayment option most mortgages come with.

 

Hello, my husband and I won $250,000 4 years ago.  We paid off our remaining mortgage and debts and bought a bigger house and had no mortgage.  Over the past four years, we did landscaping in the backyard, pool, hot tub etc, and needed money for some other things (from improper planning and budgeting).  We took out a home equity line with a maximum of 75,000 which we have used up.  (Our banker had told us that since we now had the home equity line it was wiser to switch the balance of our new van onto the home equity as the interest rates were much cheaper at 4.25%) We are now currently paying the home equity line off every month biweekly accelerated with very low interest of 4.25% until May 2012.  If we keep up the payments a lot of it should be paid off within 7 years.  What I want to know, is this good debt or bad debt? or should I say stupid debt?  As for credits cards we try to pay the full balance off monthly.  We feel like such fools having paid off our house but now owing money all over again in the tune of 75,000.  Hopefully this makes sense.  I lose sleep every night, thinking how could we have been so stupid when we had it all paid off now we owe again!.  Thanks for your help.    

Name withheld

Good debt builds assets. Student loans build your ability to earn a higher income. A mortgage let’s you build equity. Consumer debt is dumb debt. But you know that. And you’re doing what you have to do to get rid of it. The test will be how good you can be at not spending money you haven’t yet earned. BTW, you aren’t the first winner to go overboard. Many a winner has gone bankrupt because they got so used to spending big, they couldn’t stop.       


 

Hello Gail, I read your blog and watch your show all the time. Up until this year I have been a full time university student. I have never had a credit card and have always paid cash for everything to keep my finances simple and manageable. However now I have started working full time this year and would like to buy a house in a few years time with my partner. This is when I have saved up enough for a deposit. At the moment, I don't have any credit history to speak of. I have no bills in my name and have no loans or credit cards except for HECS student loan for university. Should I get a credit card just to establish a credit history? Would this be pointless if I was to cut up the card and never to use it? Also in the next few years, how do I establish a good credit history so I would be accepted for a home loan? I have been told by many people that I need a credit card to establish this history. It is not as though I have a bad credit history. It is just that I have no credit history because I have never needed credit. Could you please advise how set up a good credit history in the next few years so I will be accepted for a home loan in the future?
 
Name withheld    
    

I would indeed get a credit card and start building up a credit history. The point is not to get the card and never use it. The point is to use the card and always pay it off at the end of every month. To this end, you need to keep track of what you're spending so:

  1. Get yourself a notebook or a chequebook register (available at your bank) or notebook.
  2. Write the current balance in your bank account at the top of the page.
  3. Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, enter the amount you have spent and minus it from your balance.
  4. Every time you make a deposit, add it to your balance.

There now, you have a real-time balance that shows how much money you really have to spend, and you can't spend money you've already used elsewhere (like on a cheque that hasn't cleared, or on a credit card that hasn't come due).

Don't forget to debit the automatic withdrawals that come out of your account: your mortgage or rent payments, car loan, pay-yourself-first-savings, retirement account deposit, utilities, car insurance, and the like.

Finally, when your credit card bill comes in, check the transactions against your list in your notebook. If there's something on your statement that's not your doing, call the credit card company right away and identify the wayward transaction.

 

LOVE your show! My husband and I make a lot of money and have more than enough to cover the bills, but I'm worried that we're just blowing the extra on crap and not saving/investing enough. We just had a baby and I'm at 55% of my salary until May 2009. What's a good rule of thumb percentage wise for saving amounts and things like RESP/school/RRSP's? I have a pension but don't contribute to RRSP but need to repay 10K for my home owner's withdrawal. Help please!

Trina

Trina, at the very minimum you should be saving 10% of your net income. But an RRSP allows you to put away up to 18% of your earned income, and if you make a good income, that's what you should be aiming for. As for the RESP, you can put up to $2,500 a year away for each child and I'd recommend that you start with $100 a month, and grow it from there. And you should have a minimum of 3 months' worth of Essential Expenses set aside for emergencies. Hey girl, don't forget to be having some fun too. If you're doing the details and covering your butt, that's great. But you should also be having a terrific life.

 

Hello Gail - I'm a huge fan of the show! I know exactly how your couples' feel!
You answered a question in Dec. 2008 (the last one). I'm older and a bit further along. My snapshot is 42 years old, single and rent (can't afford the local market, plus hoping to move to another city, that's even more expensive).

No consumer debt.
Emergency Fund $18,000 (12 months essentials) ING cash.
RRSP $15,000 ING RRSP Cash Savings, plus a couple of other smaller RRSP GIC's.
Disability and Life Insurance provided by work.
New Car Account $15,000 ING cash - car is 14 years old, and will drive it until it dies.
Other Cash On Hand $20,000 (for TFSA & 2009 RRSP contribution).
Pension currently down at $135,000.00 - my portion is mandatory 4%, company pays 7%.
I have a monthly surplus of $950 - so would like to set up some sort of dollar cost averaging
I have an RRSP Contribution Room of $25,000 to catch up (long story).
HSB repayment of $4,500 (this will be taken care of with 2008 Income Tax return)

I have made every money mistake that can be made. On Oct 24th you said "You have a brain. Use it. Listen to what the experts say, apply it to YOUR life, and make it work for YOU." I find that the experts don't agree on what to do, and they go so far as to contradict each other. I have gone to financial planners and been taken advantage of. There are no fee-only planners where I live. I have no significant other to help with the decision making.

It has gotten to the point where I have too much cash. Frankly, cash is easy, no decision needs to be made except for choosing a high interest savings account and if you want to be a Rate Chaser. I need to start investing it, or I will never be able to retire (can't retire on a 2.7% return with a 3% inflation). Plus, with the market being down, now is the perfect time, so I need to get it invested before the market recovers. So am feeling time pressure.

I guess I have a serious case of analysis paralysis and, given my history, a lack of confidence in my own decision making. I just don't know what to do and my chest constricts/hurts every time I think about it. At one point I was thinking of iShares (the Coach Potato) and tried setting up a Questrade online account, but was too stupid to get it opened, let alone figure out how to transfer my RRSP funds and make the trades. It's such a small portfolio that it's not worth it to a full service broker.

So my question is what's next? I know you can't give specific advice, but would you have any general advice for me?
Thank you for your consideration, Sorry for the long-winded book. I'm not a good writer, so I hope my e-mail makes semi-sense.

Name withheld

You are right. You can't sit in cash if you're trying to grow those assets. Since you are only 42, you have a long-term investment horizon, and this IS the right time to be getting into the equity markets, but I'm not going to tell you where to invest your money because I'm not an investment specialist. I have someone who makes recommendations to me.

The first thing you have to figure out is what percentage of your portfolio you're planning to hold in equities. Larry Swedroe in Rational Investing in Irrational Times offers these guidelines for the maximum equities you should be holding depending on your time horizon:

0 to 3 years - 0%
4 years - 10%
5 years - 20%
6 years - 30%
7 years - 40%
8 years - 50%
9 years - 60%
10 years - 70%
11 to 14 years - 80%
15 to 19 years - 90%
20 years or longer - 100%

Keep in mind these are guidelines and you must also consider how comfortable you are with risk (your risk personality) and your knowledge. I would learn more about "index or passive investing." An index fund invests in all or most of the stocks of a particular stock market index to earn a return, which is equal to the index (less a small fee). While active investing involves trying to pick stocks that will outperform other stocks, and is a tough game to play even for the professionals, passive investing gives you greater diversification and lower costs.

 

Hi Gail first of all I love your show.  I have to say that it makes it seem pretty easy to get control of your finances.  Well I am facing a situation in my life right now, I am in the process of separating from my husband and I am terrible with money, I have tried to get it together but cannot.  I have credit card debt and two small kids. I am afraid of where I will end up if I don’t learn how to manage.  I would love to know where to start.  Thank you for any advice you can give me.  

Name withheld   
     

You have to start with a budget. Go to my website and use the budget worksheet to make a budget that balances. You can no longer use the cop out, "I'm no good with money." You have two children to take care of, and it's time you figured this out for yourself and for them. I have lots of useful information on my site that you can use to become more aware of what to do with your money. But the first thing I want you to do is get a piece of paper and write the following on it: "I am strong. I am smart. I can do anything I put my mind to." Paste that piece of paper to your bathroom mirror and every time you look at yourself, smile and say these words.


Gail, first of all - I love your show!  I PVR every episode and watch all of them.  The jars are very, very popular in our house.
I actually have a few questions - but first should give you a little background:  I was a single parent for many years but married a wonderful man two years ago.  He is great with my kids - so much so that when I was deployed to Afghanistan, they chose to stay with him rather than go to their father's.  When I married my husband he was carrying a large debt load.  He eventually went to Debt Managers because there was no way he was going to pay off the debt without help.  Most of his credit cards/loans were lowered to 0% interest and he will be debt free in one year.

I have a pretty good credit score - 800, which I am very proud of - I have no debt other than 6 months left on my car loan (which is at 0% interest).  And can qualify for a mortgage (posted to another base this summer)on my own.

Here is my question:  We would like to re-establish my husband's credit.  Can this happen while he is in a structured re-payment program - or do we have to wait?  I know that by using secured credit cards like the ones offered by Capital One, he can start to get back on track...Could you please help us in the right direction?

By the way - in using your budget and the jars - we should have $21,000 saved for our down payment this summer! 

Name withheld        

Congrats  on all the progress you've made. You should both be very proud. The secured credit card is the best way to begin re-establishing a credit history. Your honey could also take out an RRSP loan and repay it quickly (since most lenders love to lend for RRSP contributions, he may get the loan.) And the fact that you're building assets bodes well for your future borrowing. I think you are on the right track and now need only be patient and diligent.


Hi Gail, I've searched your website and can't seem to find the answer I'm looking for. I'm setting up my emergency fund, and I'm wondering if it's acceptable to take employment insurance into account in calculations. If I do lose my job, it will definitely be in a way that I will qualify to collect it. I make enough that I will collect the maximum allowable which is a little more than half of my bare bones budget. I have $6000 set aside, and with EI income that is enough to cover me for 6 months. Is this OK?
Thanks so much!

Adrienne
p.s. My parents are in some serious trouble, they may lose their house which is scary at 56 years old. I have sent my Mom to your website. Thank you so so very much for being there to help educate people. I wish I knew they were in trouble earlier, but what's done is done!

Adrienne, taking EI into account if you lose your job makes good sense. But what if you have an emergency of some other kind, or a series of emergencies? By all means keep the EI in your calculation, but make sure you have enough of a cushion to weather any kind of storm.


I'm trying to set up my budget based on your method. I'm wondering where to include money for home maintenance. Since I don't own a condo, there aren't maintenance fees. A house isn't a fixed expense, but where in variable expenses do you include the money that you spend on fertilizer, paint, and basic upkeep items that you need from time to time to maintain the house?

Nadine            

Nadine, these do go under home maintenance. You should be setting aside a specific amount each month for home maintenance. The rule of thumb is between 3% and 5% of the value of your home. While it may only be fertilizer and paint this year, next year it could be a new roof or furnace, and it'll take a goodly sized sum to cover big costs.


Is it smart to borrow money to put towards a RRSP and use the tax refund to pay off high interest debt?

Kelly        

Kelly, it can be smart if you have the RSP loan paid off in one year and then put yourself on a auto-saving program for all future contributions.