June 2009 Questions & Answers

 

 


Hello, I'll start with some background info. I am 35, single and live alone. I work FT and take home $2500/month. I owe approx. $40,000 in student loans and $355 on my credit card. I also attend school part time. I have no RRSP's or savings (I just have the money in my bank account). The real estate prices in Calgary have lowered in the last year and I feel I should be considering buying a place (my father said he would help me with this). However, I want to go to Law school in a year (or two) and will not be able to work FT then. So, should I be saving just for school? Should I just be saving in an RRSP? Should I buy a place? I feel paralysed about making a decision and so I end up doing nothing with my money. Also, as an aside, how do I invest my money if I want to be a socially conscious investor and not be making money off businesses that exploit or do harm to people and the environment? Thanking you in advance for your time.

Name withheld      

You sure do have a lot of questions. Let's start with the house. While prices may have come down, you don't indicate what percentage of your full-time income would go to keeping that particular roof over your head. If your mortgage payment, taxes, utilities, insurance and MAINTENANCE (approximate 3% of the value of your home each year) put you over 35% of your FT income, the answer would be "no" to the house. Currently, 35% of your take home is $875 a month. And if you're planning to move from FT to PT work, how will you continue to maintain the home? You could, potentially, take in a couple of students to help you with your mortgage payment now and in the future, as long as you're prepared for "sharing" and could keep your housing within the required percentage.

Now to the student loans: If you're already in hock $40K to student loans, you really should have that paid off before you go back to school and start racking up the debt again. While returning to school will stop the interest clock on your debt until you're finished, packing more debt on top of the old stuff will mean more and more of your income will have to go to debt repayment. If you take on the house and the additional student debt, I don't think you'll be able to manage.

As for RRSPs -- at 35, you should be contributing the maximum to an RRSP that you can every year. You should also have an emergency fund equal to at least six months' worth of your essential expenses. And if you're planning to return to school and work only part time, you should aim for a year's income in the bank as a back-up. While I know you'll be working part-time, I'm willing to bet the reason you currently have so much debt is that you couldn't make ends meet on your part-time income the last time, so you not only took on school debt, but living costs debt too.

 

I have a 27 year old son living at home. He recently was laid off from his job (where he was taking home $1400 a month). He found another job but his take home pay is now only $530 every 2 weeks. He leased a car when he was making "the big bucks" and the lease is not up till 2010. Recently he got a credit card and has already racked up $800 in debt which he is making the minimum payments. He has a cell phone bill that is not being paid off each month. He hates living at home but has given up trying to move out - he sees himself in a deep pit that he can't crawl out of. How do I help him? I don't want to enable him yet when I try to help he thinks I'm an overbearing mother. We have been charging him rent and I wonder if we should stop charging but yet think he needs to know it "costs to live". HELP! Can you come to our house and help him? I can't make him do anything - he is 27 years old. He has always struggled in school and socially (diagnosed with ADHD when he was 8) and then in high school almost died because of an unknown genetic heart disease - now he has a defibrilator. He feels like he's a loser and I want to help him feel like a man. Sorry - too many questions probably.

Name withheld    
  
Not too many questions. Let's go over them one by one as I see them.

Your son is an adult who was making $1400 a month and is now making about $1150 a month. First of all, your son needs to work harder. I know he's had a difficult time of it, but he simply isn't earning enough to stand on his own two feet. He needs to get another job, a second job, and third job, whatever it takes to be solvent.

As for the credit card, he's fallen into the minimum payment trap. He can keep making his minimum payment and the credit companies will keep sending him more cards, and he'll dig an even deeper hole for himself.

I expect that you have not been charging him enough rent. I know you're thinking of waiving it right now, but that would be a huge mistake. The fact that he went out and leased a car when he was making only $1400 a month (the big bucks) means he either got a great deal or he had too much disposable income.

I'm sorry I can't come to your house and help him. There aren't enough hours in the day, m'love. But you can help him.

First, he needs to see he is only a loser if he defines himself by the wrong things, and that taking control of his own life, becoming independent and being responsible all make him NOT a loser. Help him make a budget. Help him to see what's reasonable in terms of keeping a roof over his head, while having a life. Focus on the things that make for joy, but don't cost money.

This is a hard job, I know. It's a very hard job. But if you want your boy to be healthy and happy, you've got to find a way to get through to him. Motivate him by telling him that if he does what he needs to do, you can show him how long it'll be until he can afford to move out on his own and stand straight like a man.

You should be asking for the going rate he would have to pay for a place of his own as rent. It's the least you can do to get him ready to step out on his own. (If you want to bank half to help him when he's ready to move, that's your decision, but don't tell him.) If he isn't getting real with the real costs of keeping a roof over his head and food in his tummy, he'll always think he has money for cell phones and cars.

 

I'm 38, and I have one year left on my 7 year personal bankruptcy. Once it is over in January 2010, what happens next? Will I be informed it is over? Will the record of it come off my credit report automatically, or do I have to get it removed myself? How do I start to build back my credit? Will I now be able to rent an apartment again?

Name withheld

Your trustee will send you an original of your discharge certificate and the discharge date will be added to your credit report (there's a footnote in the legal section of your report showing when your bankruptcy started and when it was done.) Time to start rebuilding your credit. Get a secured credit card and begin to rebuild your credit rating as you are paying off the card each month. Then get a small loan -- like an RRSP loan or car loan -- and repay it. Make your payments on time so creditors regain confidence in your ability to pay your debts and you'll rebuild your credit rating. And yes, once you re-establish your credit rating, you should be able to rent.

 

Can I pay off my mortgage faster paying double-up payments once every two weeks, or am I better off to put the money in savings and then pay off an annual anniversary payment lump sum???

Laura

Laura, doubling your monthly payments will get rid of the mortgage faster because the money goes immediately to your principal reducing your interest costs, so more of your next payment goes to your principal. Careful though, don't strap yourself too tightly or you'll find yourself turning to your credit cards or line of credit to keep your cash flowing.

 

Good Morning Gail,
First let me start by saying I love your show. I have been watching it from the start. At the beginning, everyone thought I was crazy when I said it was my favourite. But now more & more I hear that they have been converted.

What I wanted to know is this:
My husband and I are not doing too badly but since your show and most questions deal with 'debt issues' what we really need to know is where to go from here. I have filled out the sheet that is on this website but I am still at a loss as to what exactly I should be saving, spending etc. I don't know what info you need from us but I can give you the basics.

My husband (43) and I (41) make about $7700.00 take home. We have no mortgage on our home but we also own a condo which has a $100,000 mortgage. At present, a tenant covers most to all of the costs of carrying the condo.

At the beginning of April, we will have no debt to speak of ($1000.00 to Leon's) but that is it.

We put $300.00 ( 2 x $150) a month into RESPs for my younger girls. We also have an older girl who is off to University next year which we are too late for. We have $12,000 saved for this.

We put $600.00 a month into our RRSP. I also have a pension plan at work which I contribute 2% and my employer contributes 3%. My husband has an RRSP at work which he contributes 1% and his employer matches it. (up to 1%).My husband usually receives a bonus which goes directly into the RRSP, should be around $8,000 this year. We also contribute here and there throughout the year.

Our tax advisor has said that if we take the money that we have saved for our daughter's University ($12,000) and add it to our RRSP contributions, we would probably get about $17 - $18,000 back. We would take the $12,000 and 'put it back' for our daughter's university education and take the rest and deposit it into our TFSA's.

I also was thinking of purchasing a condo in Florida since the prices are so low and we were going to do this in the future for our retirement anyway but was wondering if we can afford it or...
I want to make sure that we are saving enough, but I want to make sure that we have a life too. Sometimes, I think I go overboard on the savings.

I am hoping you can help us, as I really do want to make sure my family is on the right track for the future. I'm sure you will probably need a little more info from us. If you could help, I would really appreciate it. Thank you so much for your great show!!

Name withheld      

You seem to be doing so well. I'm not sure that I have much to add to your plan since you appear to have most of the bases covered. You haven't mentioned having an emergency fund, and I would encourage you to put one in place if, in fact, you don't have one. You could be putting a little more into your girls' RESPs to make sure you get the maximum CESG each year. I'm not going to throw my hat in on the decision to buy in Florida since I not nothing about property values down there, and the costs/expenses associated. I would, however, reinforce the importance of "having a life too." If you've taken care of all the details, you and your family should be having some fun.

 

I have my monthly mortgage payments and I have $30K owing on my LOC. I pay monthly $400 on the LOC. I owe nothing on credit cards. Should I cash some stock (not in RRSP) that I have to pay the entire LOC off?

Terri

Terri: It's always a good idea to use unregistered investments to pay down debt. If you decide you want to have those investments back at some point, and you choose to borrow to invest (it's called leveraging, and it can have its weakness, believe me, but it's a strategy), the interest you pay on the investment loan would be tax-deductible. So if it were my money, I'd sell the unregistered stocks and get rid of the debt.


Hi Gail, help, I currently hold an RESP for my daughter with the Canadian Scholarship trust (CST) foundation which I started a number of years ago-my daughter is 15 and will be starting post-secondary education in a few years. I have another daughter now 2.5 have and would like to start an RESP for her but I am not sure whether there is a difference between going to CST or a traditional bank. When I started looking into it with CST they mentioned that I am $3000 behind in my "older" daughter's payments which is odd, because it was a self-directed savings. Can you please explain the difference between these types of plans and if one is better than the other?

I was quite young when I started out with my first child and have a sinking feeling that I didn't read all the fine print.

Sheila

Sheila, there are significant differences and I'm not a fan of group RESPs like the one you bought for your 15 year old. I have always chosen to use an individual/family RESP instead, available at most financial institutions. As for the differences, there are many. A study prepared for the federal government on RESPs found that group scholarship trusts have a number of drawbacks, which I highlighted on this blog.


I have done a budget for years. We changed our ways several years ago because my wife used to do the money. I can't say it was a budget because nothing was written down.

We were then introduced to the idea that maybe we should both do the budgeting. So that we were both aware of where the money is and is going. I do the majority of the budgeting by writing it down and monitoring it and my wife checks up on me all the time.

My question is: I hear you mention 5 categories - Life, Home, etc. How do you categorize them, what goes in to each category?
Thanks in advance.

Bruce

Bruce, Housing is everything from mortgage payment, to rent, taxes, home insurance, maintenance and utilities, Transportation is car payments, insurance, license, public transit, cabs, tolls, parking, etc. Debt is the repayments you make you your consumer debt, not including your mortgage or your car payments. Savings is long-term (retirement) savings -- everything from your contributions to your company pension plan, CSB deductions, RRSP contributions. If you're saving for kids, that in addition to the 10% I recommend. And LIFE, ah life, the category that freaks everybody out. It's EVERYTHING ELSE... from childcare to cell phones, from groceries to entertainment... everything that doesn't fit into the first four categories goes into LIFE.


Hi Gail,
My husband and I each have 1 credit card and we have 1 line of credit together; we also have a mortgage. I am wondering if there is a need for us to own credit cards, or can we establish a credit rating with just the line of credit and the mortgage?
Thanks,

Jen

Jen, the problem with using only the LOC and mortgage for building a credit history is two-fold:
Only the person who is first named in the paperwork has the credit history for those products, so if your husband signed first, you're building his credit history. Lots of women find themselves with no credit history when something happens to their partner because the credit info was never being reported in their names.

Using and repaying a credit card is really the easiest, most reliable and cheapest way to build a credit history. As long as the bill is paid in full every month, there's no interest cost.

I recommend you get that line of credit paid off. Then start using, and paying off in full every month, your individual credit cards to keep your credit history fresh and up-to-date.


I'm going to retire SOON. Hopefully in the next 3 months. I'm guessing I'm in debt to the tune of approximately $44,000.00, NOT including mortgage, food, utilities, car maintenance. I should get about ONE HUNDRED AND FIVE THOUSAND dollars. I get Social Security of about TWELVE HUNDRED dollars a month. I would like to know if I should take a lump sum retirement and pay off all my bills, refinance my house to a lower monthly payment and live on just my social security and get a part time job. I didn't tell you I work about an hour from home, I spend about THREE HUNDRED dollars a month to get to and from work. I make about $21.00 an hour now. I'm 66 years old, I had a triple bypass in Feb of 2008. I have a financial adviser, but he wants to invest my money, I'm not sure that's what's best for me in the long run. I live in Florida, I know your show comes out of Canada, but I like the way you do things. Thank you so much. If you don't have time to answer I understand. I'm sure you have a LOT of people writing to you.

Name withheld

If I were retiring and had a whack of debt, I'd be looking for ways to get that sucker paid off. If your average interest rate on the debt is 9%, you're spending $330 a month just on interest... never mind paying back what you owe. That eats into your $1200 retirement income pretty quickly, doesn't it? So, if it were my money, I'd pay off the debt and get rid of the interest charges PDQ. Between the interest savings and not having to commute to work, you're saving over $600 that you can apply to living. That being said, while you haven't been specific about your expenses, you have a mortgage so I don't think you have enough to live on. Consider finding a part-time job or finding something you can do from home to supplement your income for as long as possible. Of the remaining lump-sum that you have, make sure you have an emergency fund set up just in case -- you don't need tons, about $5,000 should do it. And then find a good place to invest the rest. Every dollar you earn from your investments is a dollar you won't have to earn from a job. But don't take chances with the money because once you stop working full time, you won't have the wherewithal to make back what you might lose.


Dear Gail, I enjoy watching your show and find it most informative. My husband and I are mortgage free, but owe a substantial amount on a line of credit and several credit cards. We can never seem to get ahead and I am wondering if a home equity loan to be used specifically for clearing off all of our debt would be a good idea. Are there any other alternatives for us to consider. Thank you for your thoughts on this matter.

Name withheld

You've fallen into the same trap that lots of people fall into: the Get-rid-of-the-mortgage-at-all-costs trap. And the result is that you've racked up a ton of debt on far more expensive forms of credit. Get a mortgage, pay off our outstanding consumer debt, and then work to pay off the mortgage.

 

Just wondering how I sit financially.  The bank says I have a high credit score sitting around 750-800. I have been married for 14 years, and 39 years old and we have a modest mortgage and both vehicles paid for.  We have renovated our house and increased its value by 90,000 over what we paid ( real estate value) and have paid for reno's as we do them with cash.  My husband has no outstanding debt but due to high vet bills/emergencies I owe about 5500.  I pay more than double the min payment.  I add to RRSP's and investments weekly and monthly.  My current investing total ( toward my retirement not including my pension) is about 30,000.  Should I make a withdrawal from my NREG to pay off my debt?  My goal is to have a clean slate before I buy a new vehicle by year’s end or early 2010.  My husband wants to payoff the mortgage but interest is so low I don't feel this is a priority and we want to still travel and have fun without feeling squeezed.  We could live off one income and have the other to pay the mortgage and be rid of that in 5 years but my husband will not do without for 5 years in order to do so.  What is your opinion about this.  We pay the mortgage bi monthly and have a very comfortable life with no kids...so I say keep the mortgage and enjoy life to the fullest of our financial abilities. Life is short and you never know what tomorrow brings and we want to enjoy what we have worked for.  So with a combined income of 130,000 a year do you think debt ( other than mortgage) of 5500 is such a bad thing?

Name withheld    
  
It is more important that you get any consumer debt paid off before the mortgage. And paying off the mortgage should not take priority over having a life. Tell your hubby to chillax on the mortgage, focus on the consumer debt (yes, any consumer debt is bad) and keep doing everything else right. And have a life too.


I've knocked down my debts and am up to date with my bills (whew!), EXCEPT for Revenue Canada.  Any tips for dealing with them?  They tend to bully and want me to pay $20,000 in taxes at a rate which amounts to 3/4 of my monthly income. I'm self employed and struggle with cash flow. Thanks. Love the show!  

Name withheld      

My only advice in dealing with the tax man is to figure something out since he can go into your account and take what he wants without permission. I'd see if he'd be willing to settle for 12 post-dated cheques. (He usually is.) And if you have to make more money to pay him off, so be it. He won't wait forever.


Hi Gail, I love your show! I'm a 27 year old professional making $60K (gross). I have no debt, almost maxed out RRSPs, and a savings account of about $15K. My fiancé is another story. He's currently in school and working about 30 hours a week and next year he'll be in school full time. When he graduates he'll be making $55-60K within the first 3 years. He's got some debt including student debt (about $16,000) and very little savings. Don't worry - the parents are paying for our wedding next summer! I have 2 questions. First, how can we save for a down payment on our home of about 20% (in our area that's close to $75,000) especially in regards to paying down some of his debt? Second, how should my fiancé and I combine our finances? We currently have separate accounts and split the bills down the middle.

My question is what is the fastest/best way to save the money we need for a down payment? We want to buy our new home within 2 years and it seems impossible to save the $2000 or so per month that we would need. Do you have any suggestions? What I am concerned about in regards to merging finances is how far we should go to merge our finances. Should we get joint accounts and close our other accounts? Or should things mainly stay the way they are now?

Thanks - I appreciate any suggestions or help!

Camille

If you think it's impossible to save $2,000 a month for a downpayment, you'll have to put off buying until you have the money saved. After all, either you come up with the bucks, or you extend how long you're going to save. I'm not sure why you're rushing since he's going to be in school for a while yet, and there's no way you can carry a house on your income (unless you live somewhere very rural). If you're unrealistic about your goals, you'll be frustrated and disappointed when you don't reach them. Far better to set realistic goals. So how much can you afford to save. And if you do it in an RRSP, how much will you be able to add by saving on tax? As for merging your money, keep it the way it is until his debt is gone, then decide if you want to merge it.

 

Hi Gail, I absolutely love your show and your website! I find your no-nonsense approach incredibly helpful. Here is my situation: I own a house and live on my own. My debts are as follows; $10,500 on my credit card (at an interest rate of prime plus .75%), $9400 on my RRSP's that I used as a first-home buyer, and about $2000 to my parents. My financial advisor suggested something like a consolidation loan to pay all this off. However, every 2 weeks when I get paid, I always budget these debt payments into my bi-weekly budget and not getting into overdraft or using my credit cards at all (In fact, they are literally frozen in glasses in my freezer!). I am never late with any payments and work extra overtime or pick up extra shifts at work if needed.

My question is this: Should I follow the advice of my financial advisor and create a consolidation loan, or keep paying off my debts as usual (with, of course, putting any extra cash towards my credit card)? By the way, my mortgage rate is 5.35% until 2011 and my mortgage payments are $357.07 bi-weekly.

I would really appreciate your response quickly, as I am seeing my financial advisor in Mid-March.
Thanks Gail for all your advice and keep up the awesome work!

Janelle

Janelle, your debt to your parents is (correct me if I'm wrong) at 0% interest, so consolidation seems pointless on that... since the point of consolidation is to reduce your interest costs. As for your RRSP home buyer's plan loan, that's interest free too, providing your pay back the percentage every year... which you're doing. So all that's left to consolidate is your credit card at prime + .75% which seems very reasonable... as long as the rate stays put. Is your financial adviser suggesting a consolidation loan at less than prime plus .75%. If so, if it'll save you money, do it. If not, if it's just an exercise in moving the debt around, you'll have to decide if it's worth the aggravation.