November 2009 Questions & Answers

 

 


I graduated last year with roughly $42000 in student loan debt - I don't have any other debts and use a credit card for convenience only. $8000 of it was a OSAP loan (now at 4.75%) interest and 34000 was a co-signed (Thanks Mom!) Line of credit from my financial institution.

Since I graduated I've paid down the $8000 to ~$2600 paying off $500 a month since November and about 2200 before that in lump payments. The LoC will go into repayment in May at 1% of the total amount + interest (roughly $450 a month).

I have it calculated that I will be done with the loan in October and then I will push all my payments from that to my LoC which will have it paid off in around 5 years.

I'm going back to school at night for a more profitable career choice (at my employer's expense, thank budda). I'm currently in a job in a temporary full-time capacity making $36000/yr (+ pay in lieu). I'm currently getting paid in lieu of benefits but in October I will get the benefits, cease to get the pay in lieu, and 7% more will go towards an awesome pension, and 1.5% to a savings program matched by my employer. In October my monthly net income will be around $2100-$2200 a month.

I have $2300 in 2 TFSAs (1 fun, 1 emergency) and each month I add $175 plus any tax return and gst rebate $$. In October I'll be paying around 700 towards my line of credit each month. My fixed expenses are $755 (rent + cell phone only), and I've been living on a "jars" budget of $590 (I walk to work and take pulic transit, so my transportation costs are $38 a month, if that) so it won't be a shock when my income goes down in October. I hesitate to pay less for savings because I don't have room in my jars budget for airfare home 1-2 times a year ( I live on the west coast, family in Ontario), which comes out of the "fun" account, and I want to build up my emergency savings at $100 a month.

I do find the $590 to be a hard number to deal with. I have $300 for groceries, $40 for transportation, $60 for entertainment (team sports and hobbies), $50 for household/other, $40 for clothing & gifts, and $100 for entertainment(dining out basically). I go over on entertainment every SINGLE month. $100 seems like a lot, like 4 dinners out!, but it's just gone.

My question is, as you can see, I'm maxed out on my budget (and perhaps a little obsessive at planning this all out). If this was credit card debt, you'd tell me to declare bankruptcy because I owe so much compared to what I make. I'm looking for part time work because I feel pressure to pay back my loan ASAP but as I am already spending more than 31 percent of my income on debt repayment, is there more I can do? Can you see where I can cut back even more? Should I be killing myself to pay this all back like a speedy gonzales when it's a 3.75% interest rate for "good debt" or am I doing ok?

Thanks so much, I like your tough love attitude!

Jennifer

Jennifer, girl, you are doing so well, I am loathe to reprimand you for anything... you are focused, you are planning, you are prioritizing your debt repayment. For a girl just a year out, you are doing EXTREMELY well. And you should be very, very proud of yourself. I love that you've divided your pots "fun" and "emergency", I love that you're snowballing your debt repayment, and I love that you're "obsessive at planning". Don't change a thing.

As for your entertainment over-runs each month, when I take your current amounts (60 + 100) and divide by your monthly income ($36K - 18% for income taxes / 12 months = $2460 a month. Am I pretty close?) it turns out that you're spending 6.5% of your income right now on entertainment... never mind the money you're setting aside for travel to your fam. So I do think you're spending enough on that category. So the question then becomes how do you make the $160 a month you have for entertainment go further.

You're young. You want to go out with friends and have heaps of fun. If you're going out for dinner, why not have a healthy meal at home first, and then just do an appetizer or salad or dessert and coffee with friends. Or make it a game to find the best "cheap" food going. Vietnamese noodle soup is always too much for one person, so you can share, and split a nibbly.

I don't think you need part-time work to put more money on your debt. You have a good plan and should stick with it. If you decide to pick up a small extra job to give you more play money, that's okay. But don't make it become all about the debt. People can swing too far in both directions, and you should also be having a life.

A big hug to you. I am so happy to have heard from a body who is so on the money!

 

Can you clarify for me what consumer debt is? I want to make sure that I understand this so that I can understand how bad/good my debt is. Right now all we have is the car, mortgage, regular monthly bills, one personal loan from a family member and my student loan. What is consumer and what is otherwise? Thanks for your time

Michelle

Michelle, according to The Book of Gail, it's about what the money was used for. So a car loan is consumer debt. If the money from your family was to buy a house, it's not. If it was to buy furniture for a house it is. The regular monthly bills aren't "debt" unless you're carrying a balance from one month to the next. And your student debt is not "consumer" debt.

 

Hi Gail. I'm a huge fan: as a matter of fact, I'm watching you as I type this!

I would like to purchase my first home sometime this year and would like your opinion. The market certainly seems right, but I want my finances to be right also.

I'm a 44-yr-old single guy living in Burlington ON. I use Quicken to track almost every penny I spend. Here is my financial situation:

I have a good job. Last year I grossed a little over $90K. I netted around $66K if my numbers are correct. Major fixed expenses such as rent and auto total $11K. Major variable expenses were around $10K, and I am taking measures to reduce those as much as possible. I took a vacation in Italy which cost me about $2K, but won't be doing that sort of thing this year! Quicken tells me my income exceeded all expenses by about $36K for the year.

Due to the current economic situation, I am on a work share program which means my salary has been cut 25%. In addition, I am not receiving any bonuses this year, which last year totalled $5,500 (this amount is included in my gross, above). I am supposed to receive EI benefits, but they have not materialized yet. My job is a bit unstable, and I would wait to buy a home until the situation improves, naturally.

I have NO credit card debt -- I use them, but I pay the full balance every month (I have done as long as I can remember).

I have a little over $6K in a regular savings account. I have $5K in a tax-free savings acct which I opened just this spring. I have $25K in a GIC which matures in July 2009. Furthermore, I have over $55K in 2 RSPs and $6,700 in my LIRA. The only major debt I have is my car, on which I owe $8,900.

I would like to improve my retirement situation, and am considering buying either a small home, or a larger home which has a basement apartment which I could rent out so that I can have some passive income to help defray the mortgage, and thus save more.

My savings and GIC are ear-marked for a down-payment for a home, but that would leave me with no savings for an emergency. If I cut my variable spending, I know I can address that situation. I'm living with a friend right now (which is why I only pay $500 per month in rent), but this is not a tenable situation. His job and marital situation have changed, and I really feel the need to move out sometime this year.

If my job stabilizes, can I afford a home? Or should I be putting money into retirement? Can I do both? Your help would be appreciated.

Name Withheld

This is a big fricken question man! Let me summarize first:

• You're 44 and want to own a home
• Your income has just fallen by 25% and your bonus has been eliminated, so you now have a net income of about $50K a year (or is it less) or $4,166 a month.
• You have a good pool of savings, but are considering using those for the downpayment on a home that would leave you without an emergency fund.
• You're 20 years from retirement (give or take) and have $62,000 in retirement savings.

Okay, here are my points and questions for you ('cos I'm NOT making this decision for you):
• You've already experienced a change in financial circumstances because of the current economic climate. Is it really a wise idea to eliminate your emergency fund? You would need at least six month's worth of expenses covered to be okay, and if you take your "costs" (think mortgage, taxes, and everything else) up, you're emergency fund has to go up too, right?

• Have you calculated how much mortgage you'll be able to carry on your current income? The plan to get a place with income potential is a very good one, but you may want to consider maximizing that income given your new reduced circumstances. So sharing (on top of renting the basement) is something you should continue to consider.

• What's your life plan? If you love to travel putting down significant roots at this point, at the expense of building up cash you can use during retirement may be counter to your long-term goals. On the other hand, if you're a home-body and love to throw parties at home, then maybe the house is the better idea. You have to think about what YOU want, what's really important to you.

I'm of the firm belief that we can have anything we want, that when we're motivated, we find a way. I think a lot of people just skip the first step and default to wanting everything. So figure out what you want, and make it so.

 

I am single (condo poor) homeowner and have just been diagnosed with breast cancer. I will be off work for at least another 9 months. I love my condo and have decided that give up my leased car as I live on the subway line (it's at my doorstep). I don't know how I am going to survive with only 60% of my salary. As it is I live pay-to-pay now. I don't want to sell the condo as this is an investment for my retirement as I don't have much money saved to retire. Help!!!

Carrie

Carrie, I'm so sorry you're facing such a trial. giving up the car was a good first step. Now you have to go through your budget with a fine-tooth comb and trim everything that isn't essential to keeping body and soul together. Yes, it is going to be hard. You should be willing to take whatever help you can get from the system, family and friends. It's hard to be strong when the crap is hitting the fan, but that's what you have to be now.

 

Hi Gail - this is a portion of the response to a previous question..."As for whether or not to keep pushing to be mortgage free, that's a very personal decision. I wouldn't push to the point where I was having no fun, but if you've got your fun built in, no debt, adequate savings, and you want to get the mortgage over and one with, why not?"

So, we’re almost finished paying off the CL. You noted “if …we have adequate savings…”. I’m still playing catch up with my RRSP contributions AND we have not yet accumulated what I believe to be a satisfactory safety net for emergencies. So once the CL is paid you’re saying it would make more sense to take what was being paid on the CL and build up the retirement savings and emergency fund FIRST, before worrying about extra mortgage payments??? Also “planned spending” – we have an account for that, should we also ixnay that account or at least temporarily reallocate some of those funds to RRSPs and/or the emergency? This was the opinion of the account rep I visited with, but I didn’t know if she was coming from a place of sincerity regarding our financial future or that of the bank and the extra interest they’ll receive the longer we take to pay off the mortgage and what, if any kickbacks she might receive from increased investments from us.

Thanks again for any help. L.

Yes, it would make more sense to take what was being paid on the CL and build up the retirement savings and emergency fund FIRST, before worrying about extra mortgage payments. As for eliminating the planned spending, you need to have a life while you're working for the future. You don't have to catch up all at once. If you are currently happy with the amount you are saving and it is 10% or more of your net income, then you should also have some fun.

 

Gail,
I am a divorced gal with no kids. I have NO debt other than my mortgage - $170,000. I have about 17,000 in my savings accounts - 2 separate ones. 1 is for my emergency fund (7000) and the other is for saving for a new car (one day!!)(10,000)
I have a TSFA - $5000 and I contribute to my RRSPS. Apparently I have over contributed to them this year. And here is the question: How do I know when I have enough in my RRSPS? Should I move on to getting a non registered RSP? How much does one person need to retire? I find myself scared to spend my money that I have saved to buy my new car. I am scared of losing my job (Ha ha - I work for GM)On your show I know at the end you usually tell the couple how much they have for retirement and sometimes it's in excess of 250,000. Do I really need this much money? And if so - how do you know how to get that amount guaranteed?

Heather

Heather, you are doing so well, and have so much to be proud of. You're saving for future planned purchases (the car), setting aside money for emergencies, you've taken advantage of the tax-free savings account, and you're contributing to your RRSP... over-contributing isn't so good, although you can do so to a maximum of $2,000 lifetime. More than that and you may have to pay a penalty. You should get that clarified as soon as possible.

How much a person needs to retire depends on how large that person intends to live during retirement. My projections are meant to inspire people to keep on the savings track. (FYI, I use an RRSP with the tax refund re-invested, at a rate of 7% on average for those calculations. Sometimes people have pretty big numbers at the end because they are starting very young and have loads of time for compounding to work for them.)

I have several articles and blogs on retirement on the site, and I suggest you read through them and see what works for you. You must always take what I have to say in the context of what works for YOU!

Good luck, and thanks for your letter. You're doing great, so keep it up!

 

I've been fortunate to come into an inheritance. I've paid off most of my debts and have the mortgage left which was renewed at 3.85% x 5 yrs (11 yr ammort) I also now have a property with a clear title and plan to move there within the next 4-5 years.

What is the best thing to do with the dollars left?
1) Pay off the mortgage in whole.
2) Pay off the max amount each year and top off my RRSP's & TFSA,
3) Buy another property?

The money is sitting in a 3% GIC till I decide what to do but I don't want to be cash poor by paying off the mortgage (170,000.) I'm making max payments right now on the mortgage(700. bi-wk) and could put down 30,000.00 per year for the next 5 years along with my payments. But with the real estate tanking where I live (BC) buying an income producing property also sounds right at this time.

My prior mutual fund portfolio has decreased by thousands in the last year so I'm a little leary to add even though they say now is the time. What would you advise? My other small question is with regards to personal allowances for spouses. What is a 'reasonable' weekly allowance for personal spending, coffee, lotto, etc.?

Name Withheld

I'm not going to tell you what to do with your money, but I will point out some things, and ask some questions, that I hope will help with your decision.

1. Any money you put into the matrimonial home immediately becomes joint property. However, if you keep an inheritance segregated (not joint), then those assets remain your assets no matter what.

2. If you have unused RRSP contribution room, any amount you contribute will help to reduce your taxes in coming years, giving you a double-bang for your buck.

3. If you do not have an emergency fund set up, you should set aside the equivalent of 6 months' essential expenses using a TFSA, or any other high-interest savings option.

4. yes, the real estate market looks pretty good right now. It is only a question of how much patience you have.

5. Following the investment wisdom, "buy low and sell high", this is exactly the right time to be buying.

6. As for personal allowances, it is whatever you agree on, that you can afford, given your budget and needs.

 

I have savings accounts with ING to save for our Emergency Fund, Vacation Fund (we are both self employed), Income Tax and Property Tax.
I have the Investment Savings Account.
Should I actually be changing these over to the TFSA?
Thanks for answering our questions and look forward to hearing back from you!!

Name Withheld

You should definitely be taking advantage of the TFSA, so whether you use it for your emergency fund, or to store up money for your income-tax/property tax, etc., don't let the "tax free" advantage of this plan pass you by. Shop carefully for the best rates.

 

Hi Gail! My husband and I have been followers of your show and we are having a lot of success (yay!!). We have paid off 6 credit cards over the past two years and cancelled them, we each have a credit card, mine is at $10,000 (11.9% interest) for trips, booking hotels, etc. My husband's is a small one he has had since high school at $1000 (19.9% interest). I was thinking that it might be a wise financial move to have him cancel his credit card, and apply to have him as a co-applicant on mine. That way I would have only one credit card payment, with a lower interest rate (and it’s not like we use them- we have been converted, thanks to you, to "cash only" people). My husband is hesitant and says it will affect his credit rating because he has had this credit card forever and has good credit with it. Is there any truth to this? And at 19.9% is it worth it??

Name Withheld

Your husband in right. You each need to have your own credit identities. However, you should put away the high-interest credit card. Apply for a lower cost card, transfer the balance, and use that lower-cost card. Keep the card with the history in a drawer until you've established at least a six month history on the new card. (one year is better).

 

Hi Gail!

I've been watching your show for years, and my family has been living on a cash basis for some time now, with no debt other than our mortgage. The one area I can't seem to trim down, though, is our grocery bill! We have four children, and I try to bake and make from scratch everything I can, but our bills still seem so high. I have tried many of the things out there, like freezer cooking, frugal meal plans, etc., but haven't been able to get down to the kind of numbers you give people on your show. Do you have any resources you can suggest for paring this area of the budget? Thank you so much!

Charity in BC

Charity, if you're budgeting $50 a week per person, you're doing fine. If you're over this, it may be that your "growing" family needs more nutrition than some of the much smaller families I work with. As long as you're conscious of what you're spending, and you're doing the best you can, I'm not sure why you're worried. Are you over budget overall? If not, don't sweat it.

 

My wife and I bought a house 7 years ago with the intention of upgrading when we started a family. Our financial situation is solid with the only debt being our mortgage. Should we upgrade to a larger home to accommodate our first child or stay in our current house and be debt free in 2 years?

My wife and I bought a house 7 years ago with the intention of upgrading when we started a family. We are now 32 years old and had our first child. Our financial situation is solid with the only debt being our mortgage. We currently have 2 years left before we are mortgage free (and debt free!). The burning question that we are struggling with is whether we should upgrade to a larger home to accommodate our addition or stay in our current house and be debt free in 2 years. Our current house is adequate but it would be nice to upgrade. The price range of houses we are looking at would increase our amortization schedule by 15 years.

Jamie

Jamie, you and your wife have done very well and should be extremely proud of yourselves. I know that being so close to "debt free" feels almost intoxicating, and the idea of assuming more debt anathema. I cannot answer this question for you. This is a life decision, not a financial one.

Clearly you feel in control of your finances. And so now you are wondering if it is worth it to take on more commitment just when you've got the snake underfoot. The question you and your wife need to answer is this: are you happy where you are, and is where you are good enough for your purposes? The answer to that question will tell you what to do.

I do not consider mortgage debt to be bad debt unless more of it is taken on than a person can handle. If you think more house is better, and the mortgage you must assume is worth it, then so be it. Make that your choice. If you think the freedom on no mortgage has more to offer your family, there's the other decision. It is, however, your decision.

Take pleasure in what you have accomplished thus far. You have done remarkably well and should be very proud.

 

My husband is terminal with Cancer, and may only have a few months to live. We also have a handicapped child, who requires constant care. My mortgage comes up for renewal in 3 months. Should I consider selling my home ($60,000 in equity)? We have about $15,000 in combined debt (student loans & credit cards), and an interest free car loan of $15,000 = $30,000. I also have the option of putting in a rental suite on our property (cost $10,000), which would give me an additional $1,000 per month income. Which would cover my mortgage, and allow me to live rent free. I am self-employed so I have a fluctuating income (feast & famine). I watch your show all the time and respect your opinion. A huge fan.

Name withheld

You have a lot on your plate, and you need to sit down with someone and actually work through the numbers. Go to your local financial institution and ask them to help you. Don't make a decision of any kind when you are there, simply go through all the questions and answers you need to make a decision. Then go home and think about it.

Here are my thoughts/questions:

• Can you generate enough income from your work over a year to cover your essential expenses, care for your husband and look after your child without doing anything?

• Do you have a budget that covers just your main expenses for those famine months, that you can then expand during the feast months?

• Does the rental income cover just the mortgage? Or mortgage & property taxes, and what else? And does that include the $10K you would need to ready the unit?

• As long as the payments are not unmanageable, the car is irrelevant because it has no interest cost.

• If your mortgage is up for renewal, would it make sense to increase it slightly to pay off the CC/loan and fund the rental unit renovation?

• Are you saving anything? Do you have an emergency fund?

• Are you getting any financial help with your child? Tax benefits, financial support? If not, could you?

If you want more help, I'm happy to continue this conversation with you, providing you give the answers to these questions.