October 2009 Questions & Answers

 

 


What is the best way to teach my 15 yr. old daughter about money. We have decided to ask her not to take on a job right now therefore we are willing to give her an allowance. How much do you think we should be giving her?

Adriana

Adriana, my 15 year old daughter gets $15 a week for allowance. Of that 10% must go to savings. 5% goes to "sharing". The rest she can do with as she pleases. But that's all she gets from me other than birthdays, Christmas and special occasions. She also gets $50 a month as a clothing allowance. From that she must buy what she needs except for her outer-wear (I want to make sure she has a good coat) and shoes (I spring for 4 pairs a year because she's still growing.) Everything else she must budget for. Hope that helps

 

Gail, Let me start off by saying: my fiancé will leave me if I don’t stop forcing him to watch your show. He enjoys it too, he just can’t stand when I watch the re-runs over and over (and over). I have a question that I know you have touched upon but I can’t find a situation in your questions that applies to my situation.

I am 21 years old and last year I financed a car. The loan was an open loan for $17 098.11, 5 years at 8.89%. I currently make $154.73 payments semi-monthly. In the last few weeks my fiancé has made a $2 000 payment and I made a $1 000 payment. The current balance on this loan is $12 027.10.

I work full time and I am on salary, I make $2 322.78/month. I began to get my finances in order in the summer of 2008 and paid off all of my credit card debt and began to live on a budget. I don’t pay rent (thanks mum and dad), and my monthly expenses include

* Car loan $309.46
* Car insurance $248.66
* Fuel for my car $120
* Cell Phone $50.

I give myself a little bit of spending money as I have learned I do not need much $200.

My current monthly budget is pretty controlled at this point and there is an excess of $566.53 after I have made my monthly contribution to both my

RSP ($100) and
my savings account ($711.76).

We wanted to accelerate the payments on my car loan, so we can apply for a mortgage debt free, by adding the excess $566.53/month for a total of $875.99/month. This will have my car loan paid off almost 3 years early.

However, using the calculator I found in your Q and A section, I found that if I added $781.90/month to my $309.46/month payments I would save a lot on interest (A LOT) and have the loan paid off in 12 months. I would take this extra $215.37 from my monthly savings with the idea that the 309.46+566.53+215.37 = $1091.36 freed up in 12 months would quickly become the savings I need to make a down payment on a home.

I then began to think that I could easily forgo saving as I have currently $5, 000 in a TFSA (which can act as an emergency fund) and also apply all of my $711.76 to the car loan, making my monthly payments $1587.75/month (711.76+309.46+566.53) paying off the loan within the remainder of this year.

So the question is, what is the harm is in accelerating this way when it will free up so much of my money for savings in the future? I am loath to stop contributing to my savings account but I will be able to contribute much more later on.

Daniela

Daniela, very often when people get bitten by the "debt free" bug, they want to go whole hog. The problem is that whenever you do anything to the extreme, even pay off debt at the expense of other categories in your budget like savings, you're destablizing your financial foundation. I know, m'love, debt free is just around the corner. If you want it that badly, find a way to make the extra money so you can ramp up your car payments AND keep your savings in place. While you may think $5,000 is a lot to have as an emergency fund, you'd be surprised at how fast you blow through that money if an emergency of any magnitude comes up. Yes, by all means, add your "extra" to the car payment, but do not sacrifice your savings.

 

Hi gail, Thank you for your show and all your helpful advice.

My boyfriend lives with me and my two children (8 and 6) and has serious debt problems, other than affecting the amount of money we can spend on activities together, thankfully I have been able to protect myself from any negative side effects of his debt problems. However one problem we do have is determining how much money we each need to put into the joint account for food since they are MY children. I have been putting an extra 150$ a month till now but he is saying that it is no longer enough, creating a very difficult and uncomfortable situation. so... I was wondering if you could help me determine how much money would normally be spent on a weekly basis for groceries for a family of four (ok... two growing boys to take into account). I do realise that this depends on income, debt and all the other factors but if you could give us a reasonable range it would be appreciated. thank you very much... it really is a shame that you can only take on couples in the GTA, we would certainly make for an interesting-representative-of-the-21st-century-family show!! But keep up the good work!

Name withheld

The best way to figure this out is to take whatever it costs you to buy food for your family and split it four ways... you pay three-quarters and your boyfriend pays one-quarter. So if you're spending $800 a month on food, you'd have to pony up $600 and he'd add in his $200. That "food" does not include booze but does include personal care items like deodorant.

 

Hi Gail! I love your show and watch it all the time. I recently purchased my first condo and have adopted the jars and find they are absolutely keeping me on track! My question is regarding savings. I'm 27 and have been putting money into my RRSP's for a number of years now. I had about $12,000 in one account, but it was in mutual funds so I ended up losing 50% of it. A further $7,000 in another account was used towards my condo's closing costs as a first time home buyer. I have now started a new RRSP account and put 5% of my monthly income there and a further 5% into a TFSA. How can I maximize the monthly compounding of my money? What I had previously saved showed little in compound interest. It is my goal to have a huge nest egg of millions of dollars upon retirement. What is the best way to get there? I'm a bit vague which way to go... RRSP or TSFA? I have also started a high interest savings account (2.75%) for whatever I have left over (including gifts and unexpected money). I would like to know whether my approach is correct and also how best to maximize my savings in these accounts. Any advise would help, thanks and keep up your great work!!

Name withheld

If you're determined to have "millions of dollars" saved for retirement, I suggest you go to www.fiscalagents.com/toolbox/index.shtml#tb2 and use their calculators to do some projections of what you will have to save and how much return you'll need to generate. This will take some time. There is no easy answer. But if you work through the process you'll be better informed.

 

Hello Gail! You are awesome! My youngest son and I watch you alllll the time and we love your 'straight up' style! My question is...our sons, 24 and 19 are going to be receiving an inheritance of over $100,000 each. The oldest is already out working in his field, living on his own, getting married next year and would like to get into the housing market. The youngest is heading to four years of university, living at home (at least for the first year). Given the current economic times...what are the best options for them as far as investments and how to prioritize their 'wants'. What do you do with an inheritance?

Name withheld

What your boys end up doing with their money will in large part depend on what they want from their lives. You've already said that one son wants to buy a home. So his money might be great as a down payment. The only thing he needs to know is that as soon as he puts that money into the "matrimonial home" it becomes half his wife's money. If he kept it separate, it would always be "his" money. As for the son in university, it would seem the money has come to him at a very good time since this will avoid student debt and interest costs. If you are trying to "protect" this money -- not spend it and use it for investment purposes -- then you'll need to find an investment specialist you can trust to guide you through the maze of options available. I'm not going to give investment advice.

 

I saw an article in Homemakers that you wrote (April '09) - inside it said that debt should be no more than 15% of household income. I am wondering if this 15% includes Mortgage (or rent). I did calculations and I am within this limit if I don't include my mortgage payment.

Related to above - I have increased my mortgage payments to pay my mortgage off faster (if all remains the same, it will be paid off in 4 yrs + 1 month). My credit cards get paid off 100% every month, but I have about $14K in a Home Equity line of credit. The HELOC is 3.5% right now & the mortgage is 5% (under $50K left) - am I better off reducing my mortgage payments & increasing payments to my HELOC? I make payments to the HELOC (more than minimums) as well as savings & RRSP every month - I just want to make sure I am applying my income in the most efficient way. Any sites with good tools would be appreciated as well!

Name withheld

Your mortgage falls under "housing", not debt repayment. And a car loan would fall under "transportation". You sound like you're doing quite well. You should be aware, however, that rushing to pay off the mortgage while racking up debt on the line makes no sense, regardless of the difference in interest rates. You should work to pay off your consumer debt first. And it's not just about being "efficient", balance is also important.

 

I have paid off a few of my credit cards (4 to be precise) and I want to cancel them but I heard that it will affect my credit score. What should I do?

Gregg

Gregg, when you cancel a credit card you eliminate the reporting and, potentially, the history of that card on your credit bureau report. So cancel the cards with the shortest (or worst) history, and keep the other accounts active, even as you put away the cards so you don't use them. Keep in mind that as long as you pay off a credit card balance in full by the due date, there's no cost, and credit cards are still a great way to keep your credit history strong.

 

You always make reference to the fact that debt repayments should be no more than 15% of a budget. Why? Is there ever a circumstance when it can be more? You also talk about not having to take longer than 3 years to pay off debt. In our case, we cannot pay off our debt in 3 years with 15%. Now what?

Name withheld

If it takes more than 15% of your income to make your debt payments, you have too much debt. I do not mean you should only pay 15% of your income in credit payments. You must pay whatever it takes to get to consumer debt free in three years or less. And if that means you have to make more money, so be it.

 

Dear Gail,
I watch your show all the time and it has really helped me to turn my financial situation around. I am a 22 year old, 2nd year college student who works part time during the school year. Nearly a year ago my vehicle was hit while parked and being an old car, it was written off. As I require my vehicle as transportation to school and for work, I had to use up my savings in order to purchase a new vehicle (2005 model) but now I am left with a $4500 car loan (originally $7200). I work part time and live off savings from working the summers, so I don't have any other debt. I have been making extra payments but my coworkers keep telling me that I'm wrecking my credit history that way. Am I better to keep the loan at prime + 2% and make the minimum payment every month, or tap into my stocks/GIC's/RRSP's to pay it off asap? Also how long do you have to keep a loan to have it impact positively on your credit history?

Thanks,
Amanda

Amanda, you are NOT wrecking your credit history by making extra payments. The only way to wreck your credit history is to make payments late or not at all. Do not tap your RRSPs. And make sure you have some cash readily accessible for emergencies. You already know what an emergency is, so I won't have to talk you into it. You only have to keep a loan for about six months for it to tell a good story about your repayment abilities. Keep up the good work.

 

Hello Gail

I have a credit card that has been frozen. I have been paying $100 every month, occasionally $200 for 2 years now. The interest rate is 23.50% annual. The total is $2936.84.

I have asked the CC company about a reduced interest rate and was told that because my payments are not in arrears that they cannot help me. They suggested that I default on some payments and only then would the collections department be able to set up a new payment plan.

I had also asked about renegotiating the balance to pay it outright. They informed me that to the best of their knowledge that was only possible if I was filing for bankruptcy. I suspect that this is not the case but really don't know.

What would you suggest as a course of action?

Name withheld

Every month $57 of your $100 payment goes straight to interest, so you're paying $43 a month on what you owe, which means it will take you almost six years to shake free of that debt, and it will have cost you over $3800 in interest! Ouch! You most certainly CAN pay the balance off in full at any time, so I recommend you find a cheaper source of money and do so PDQ.

 

Hi Gail,

First of all - thank you!!! Love the show - even when I watch repeats or online I pick up on something I missed the first time. We were on the right track, and you helped us to tweek things.

We use your strategies - not quite as rigidly as seen on TV as I don't believe we need to (I'm sure the people on TV didn't think so either!). Anyway, here's the situation...

We owe 50k on our mortgage (25K amortization, we're on year 9 and hope to have it paid off in 2-5 years) - we have been putting extra on it (anywhere from 50-150 bi-weekly - currently $150.00)Our current actual mortgage payment is $299.93 bi-weekly at an interest rate of 1.90% (we took a chance and went with the variable when we renewed in July and so far it's paying off) We have $2350 in debt on the credit line (only due to household upgrades that were necessary - needed new electrical, furnace and h/w tank). The C/L is @ 4.5%. We would like to pay 450/week on the CL...Should we continue with our $150 bi-weekly extra mortgage payment or should we cut that out until the CL is paid off? Does it/ Will it make a difference? (300 of the 450 is reallocated from investments and emergency) Paying $450/week on the CL puts us to what we chose as our income limit for the week (99.51%). Also, CL aside, does it REALLY make a difference now if we pay the extra 150 bi-weekly on the mortgage seeing as how the interest rate is so low and most of our payment is going towards the principle anyway?

Look forward to hearing from you. Let me know if you need more information.

Best Regards,
Name withheld

Focus on getting the line of credit paid off first... it's a higher interest rate, and consumer credit should always be the first to go. 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 done with, why not?

 

Hello, I am in my early twenties and live at home.... I make roughly 30,000 a year and am approximately $5000.00 in debt, I know it's not much but I feel like I am living pay check to pay check and am constantly in my over draft. I try to make payments every pay check on my debt, my loan payment is automatic and is 150.00 every two weeks I have about 3000.00 left to pay on it, I never miss a payment on that. I pay rent at home $300.00 a month and I have a cell phone that is about $60.00 a month and I am stuck in a contract and cannot get out of it for two more years. My Visa is at 1600.00 and I make a payment every month.... but not always very much. I have tried to budget before, but I can't seems to budget when I know I have so many other things to pay for. I know my money goes to silly things but I just can't seem to cut it out. I've gone to the bank and talked to them and they tell me to make a budget.... but how do you budget when you are already in your over draft. I know I make good money and should not be in this situation.. but I am just not good with money at all.

Thank you

Name withheld

Never mind the "I'm not good with money." Grow up! You make $30,000 a year and only pay $300 in rent! Sweet deal. You should have plenty of money to get that debt paid off. Never mind that you're in overdraft, you need to make a budget. Go here: http://www.gailvazoxlade.com/articles_f/article31-2.htm... read the instructions (print them so you can follow them) and use the Interactive Budget to make a plan. If you know you have a problem with compulsive spending, put away the cards (credit and debit) and only carry the money you absolutely need with you. Learn to live on cash. Focus on getting the debt paid off FAST! Then focus on getting yourself ready to live independently.