April 2010 Questions & Answers

 

 


Hi Gail, I am attempting to advise a friend on debt repayment.  Not too happy about doing this as I have only my personal mess and clean up to base any advice on – and of course what I have learned from 'Til Debt.  But they asked and I could not think fast enough to come up with a believable excuse.  At least they are serious about getting out of debt.  Anyways this is our problem and questions.

They are both fifty and have no kids left at home or in college but do help to support aged and infirm parents.

They have $38,000 worth of consumer debt left.  I am not including mortgage or car payment in this as they are within the 35% and 15% guidelines.  The car will be paid off in a year.  The mortgage ($135,000) will be paid off by the time they retire because they are doing the accelerated pay down of the principle thing - $100 bi-weekly.  Based on selling the house at current real estate prices they have $100,000 in equity in their house.

They have a $4200 per month net income.  The possibility of increasing this is remote as the wife has some mental/emotional health issues and the husband already has to take care of nearly everything as well as working full time.  His department just shut down all overtime.

They have a small emergency fund of $5000 and nothing in retirement other than a pension that he will get through work.

They have already done the reduce all fixed and variable expenses to the bare bones and sell everything they don’t need thing.  This paid off about $3000 worth of consumer (lawyer) debt.  They no longer use credit cards or debit cards.
 
I have helped them to do this and to set up the jars and a budget – which does balance.  Sort of.  We have assigned a little less than 10% ($400) to savings and a little more than 15% ($650) to debt repayment.  This means that it is going to take them more than 5 years to pay off their debt ($38,000 / 60 = $633.00 per month).  To pay off the debt in 3 years would mean paying $1055 per month and there does not seem any way to find the extra $400.

I do not know what to tell them.  Should they stop the accelerated mortgage paydown and put that money towards the debt?  Should they increase the mortgage and use this to pay off the consumer debt?  They would definitely save on the interest but both are really wobbly when it comes to this idea and because they had some arrears payments their credit rating is not all that good now.  In a year when they finish paying off their car they will have about $400 to play with.  Should they use this to pay down the debt or put it towards retirement savings?

Thanking you in advance for any advice.

Maureen

Maureen, cudos to you for stepping in where angels fear to tread -- between friends and their money! Girl you've got my utmost respect and you will be repaid in spades when what goes around comes around. Now to your questions:

I think they should hold off on their accelerated mortgage payments, redirecting that money to the consumer debt. And yes, when the car loan is paid off, all of that should go to the consumer debt too, since they are already used to living without this money. 

My first choice would be to consolidate in the mortgage, but if that's too horrible for them to contemplate, the tactics you've suggested will see them debt free faster.

Take a hug for being such a good friend AND for giving such sound advice.

 

I am a single parent with one child.  I am not in debt, but with before and after school care and all other expenses that go with having a child I find it very hard to save anything including contributing to his RESP.  I currently put 15 bi-weekly into CSB (in his name) and 25 biweekly into my RRSP.  Is this a good way to go or should I put all the eggs in one basket (so to speak)?  I've only been contributing to my RRSP for about 3 years.  My current age is 48.  I will retire in 7 years with a pension.  Any thoughts on life insurance?   

Name Withheld

Since you have a pension at work, I would focus all the savings in two places: an emergency fund and your son's education. You should have an RESP for him, but one from a bank (an individual plan) not from one of those companies that sell "group RESPs". As for insurance, at your age with a limited income term insurance is likely your best option. Shop around.

 

Hi Gail, My husband and I just purchased our first home. We took out an RRSP loan for our down payment of 22,500 (5%). I have a car loan & student loan, but other than that our bills are just the normal household type.

We have no savings. My husband thinks the best plan is to pay off the line of credit (used to buy the rrsp loan) before we start saving. I am not comfortable with this. I know we have to pay that off as soon as possible, but feel we also need to have some sort of nest egg in case of emergency. And, my next question is, how much is enough to be saving? What do you say?

Name Withheld 

I say you are right, saving now, particularly an emergency fund, is important. As to how much, I say start with any amount, can you swing $25 a month? Then as you save money with your smart shopping and careful money management, add those small amount to your savings.

 

Hello Gail.  Your show is fantastic.  My husband and I are busy putting our financial house in order and have made great head way in paying off our debt.  We would like to set aside money for a three month emergency fund and start saving towards a home purchase once our debts are totally paid off.  We want to apply the pay your self first at 10% rule, but we cannot agree on how to save our money...high interest savings account?  TFSA?  RRSP and take advantage of the first time home buyers program? We are paralyzed at the moment and would appreciate your advice.   

Name Withheld 
      
Where you place your money is in large part dictated by what you want to do with that money. If you're planning for retirement, an RRSP is an obvious choice. Ditto if you plan to use the Home Buyer's Plan to get into a home. But since you're talking about building an emergency fund, the TFSA is the ticket. I think it's the single best alternative for emergency funds. Make sure you're doing a little of each... long term and emergency fund saving... so you plan is balanced.


Dear Gail, First of all it was an absolute pleasure to finally meet you "in the flesh" at the pic-nic.  I will never forget the look on my son's face when you "introduced yourself to him with your signature line from the show".

I have a quick question. I have absolutely no consumer debt other than my mortgage.  I have a colleague at work who has been arguing with me that it makes sense to use a credit card (with an annual fee) just to rack up travel points to get "free tickets".  Of course, she says the key is to pay it off every month.  I have a Visa card "just in case" but don’t pay an annual fee and get dividend dollars back at the end of the year.  I cannot wrap my head around paying the annual fee even if it is "only $120.00 a year".  What is your opinion?  Is it wise to pay the annual fee just to get the travel points?  I faithfully follow your principles as they make so much sense to me. Thank you for being the "whiz" that you are…   

Name Withheld 
      
It was a pleasure to meet both you and your handsome young son. The answer to this question begins with another questions: how important are those travel points to you? For me, not so much. So I have a free card that gives me the kind of points (groceries) that I know I'll use. You sound like you have a dividend dollars back card that's working for you. I think one of the hardest things to deal with in life -- and it affects our money -- is the advice we get from family and friends. Sometimes the things they say sound so sensible that we begin to question ourselves. Don't. You know what you want. You know what's important to you. And if you think paying $120 a year for a credit card is kinda pointless (yeah, I do too), then skip it, smile and say, "I love my system. It works for me!" Take care, and give that boy's head a ruffle for me this morning.

 

Dear Gail, In these hard economic times, are pets always considered a luxury item? We never considered getting rid of our cat but, when discussing our finances with others, we receive quite a bit of flack for the enormous costs our cat entails.

There is a huge emotional factor: our daughter was sick growing up and the school-provided counsellor had suggested, since she has wanted a cat for many years (so clearly this was not a phase), that it might do her some good.  So a little bundle of white furry love joined our family. He was a great mouser (wonderful since she’s afraid of mice) and he has bonded strongly with our daughter, following her throughout the apartment years later. Within a year, her health improved greatly: she was sick less, stopped taking medication and is (mostly) able to control her condition through diet. Unfortunately, as her health improved, his declined. He had a genetic condition that can easily be controlled (now) by a daily pill. As my daughter likes to point out, not only should he be taken care of simply for being family, maybe the fates knew that we not only would we have experience caring for someone through illness but that we wouldn’t question a creature being allowed to lead a happy, (seemingly) healthy life when a pill fixes it. In addition, whenever there was talk of passing him on (like when we thought someone might have developed an allergy after a few years) she not only cries for her bond with him but reminds us that sick cats usually are not adopted from ads or the local shelter (which euthanizes after a week), despite his pills being only $20/month.

Still, they think our costs are outrageous. Since owning a pet means huge annual costs, he has “his own” banking account in which we put in $20 a week to average out his costs: e.g. his physical with a blood test (required to monitor his condition), his pills that we buy every quarter. I admit in some ways he has it better than us, eating a high-end, natural kibble. I justify it in that he has less episodes on the food (meaning less medication and frustration) but also he eats less of it, so it averages per bowl to about the same as Whiskas (so not the cheapest, but a middle-priced brand). We spend more on litter to get a flushable brand that controls smell well. However, for both food and litter, we buy huge bags every quarter which turn out to be cheaper per scoop than buying willy-nilly. Any treats he gets must be related to his health: either they aid with hairballs or control tartar (which he has a problem with the latter, so we consider tartar control treats a necessity).

Admittedly, toys and some other items are not included in this budget, for which we do not have exact costs. However, we do have a system: we celebrate his birthday every year with a small cake for the family and presents. The presents replace any worn items, whether they be toys he has chewed through or one year, I replaced his harness. The cost comes out of our own “disposable” income. For accidents and sudden illnesses, it helps that we are a year ahead with our cat savings. We take the money from his account, and then increase our contributions to get it back up for the next cycle.

Our cat expenses are not as perfectly in control as I would like, but we’ve thought it out, have plans, and always work back to our plans. Making it a regular thing reduces this feeling of him being a “luxury item” and I think people are overly critical. Then I think maybe I have it all wrong. Maybe he’s more like cable: a luxury item that you wouldn’t want to give up. However, there have been times in my life that I’ve gotten desperate enough to give up cable but less and less can I foresee any circumstances where he would leave our family. Four years and counting.

Is he a luxury item? And does our budget have any effect on this factor?

Lauren

Lauren, this is the first time I've had a question about a pet and the costs involved. The one thing you don't say is if the costs associated with your furry friend are putting a significant strain on your budget. Is that $80 a month needed elsewhere? If it isn't, then you should stop listening to your friends and just enjoy your cat. If that $80 is stressing your budget, my next question is what are you prepared to give up to keep the cat and balance your budget? It isn't a matter that the cat is a waste of money (although people who have never bonded with a critter may think so). It's how important the cat is and what else is less important. I have had creatures most of my life. This is the only phase where I've had no fluffy to hug and cuddle and I miss it like hell. There are all sorts of positive reasons for having a cuddly one around, including many physical benefits, some of which your daughter has already experienced. ike everything else in life, it's not just a black and white money decision. You must give careful thought to the benefits you, and your daughter, derive from the cat.

You sound as if you have a very workable plan for dealing with your cat expenses. I applaud you for having thought it through so clearly, and for being sensible about managing kitty's expenses. Now you just have to decide if what you want is more important than what your friends think. I vote for the cat!

 

Hi Gail, After moving back to New-Brunswick after three years in Montreal (making good money) I realized how in debt me and my boyfriend got into a lot of credit card debts. We were thinking about doing bankruptcy, but we made an appointment whit a Credit Councellor! I would like to know if it's good ideas? Some people tell me, that after i'm done paying whit them, it will show in my credit report that I made bankrupt, is that true? Please i need your help!

Name Withheld
      
You don't say what your income or debt is so I'm just going to deal with the credit counseling question. When you declare bankruptcy, the R9, which is the credit code for bankruptcy, stays on your credit report for seven years from the date of your discharge. So if it takes you a year to discharge your bankruptcy, you'll have a shabby credit report for a total of 8 years. If you go the credit counseling route, the R7, which is the credit code for counseling, stays on your report for five years from the date you fulfill your commitment. So if you come up with a three-year repayment plan, you'll have a shabby credit report for a total of 8 years. Lenders do not really consider an R7 to be better than an R9. They both suck. As for whether to choose bankruptcy or credit counseling, I get all the information on both that you can, do the math, and then make an informed decision.

 

First of all, thank you for all your ideas! I do have a couple questions though. I am a second year college student who works part-time and commutes back and forth every day. My expenses calculate to about $400 a month, and my income is just about $800/month. I know I can save quite a bit, but I am having a hard time getting motivated...I like to shop. I currently have no debt at all, but I'm worried that if I don't get on track, I will end up there. What ideas do you have for motivating my butt in gear? I really want to get ahead while I am young.

Here is my monthly budget so far:
Car Insurance: $190.00
Cell Phone: $50.00
Gas: $160.00

I do have plans for the next two years...(like a "frugal" wedding with a budget of $5000) but I want to make sure that I am successful with saving and making a budget first. I'm not sure of all I should be saving for. Any ideas? Please help!

Name Withheld
      
What a thoughtful and honest question. There are a whole bunch of reasons to save. From protecting yourself from emergencies, to making sure you don't end up a bag lady when you're retired, saving some of what you earn now for some future date gives you options. When you have money in the bank, you have choices. As for how to motivate yourself to save, there are a bunch of things you can do:

• automate your savings: have $25 a week deducted from your bank account and moved to a high-interest savings account or TFSA for emergencies. It's gone, you don't have to think about it.

• ditto your retirement savings... use an RRSP.

• if there are things you want to buy, while you may have to save up for them, that's not "true savings" since you're planning to spend the money. So if you want to save for a vacation, open up a savings account called My Vacation account, and put a little aside each month to meet your goal. How much you put aside is dependent on what you want to achieve. Want to go on vacation in 9 months? Trip will cost $1,200. Then you need to put aside $1200/9 = $134 a month. See how easy?

 

Hi Gail Huge fan. I wanted to know your take on these online debt relief companies i.e. www.ccdr.ca I can not get a consultation loan and feel this is my only option.

Tyler   
      
Tyler, I'm not a fan of debt relief companies. When you go through the process, like credit counseling, it leaves a big black mark on your credit history that has lenders treating you as if you'd gone bankrupt. Some debt relief companies also use tactics to strengthen their negotiating position but hurt you. For example, some suggest clients stop making all payments on their credit for up to six months so lenders feel the pinch. In the mean time, your interest rate keeps going up and the interest charges grow dramatically. Then you pay a fee "on what they saved you", but they put you further in the hole first.

I believe that either:

a) you figure out a debt repayment plan that will work, do your own negotiating, and get yourself out of debt, or
b) you visit a bankruptcy trustee to see what your options are for a consumer proposal or bankruptcy.

I'm sorry you're in a tough spot and hope this helps. Please do some more research before you make your decision.

 

Hi Gail, I make about $42,000 a year, before tax, and take home about $2400 every month, that's after tax, deductions. This also includes about $178/month that comes off my cheque for my RRSP (about 5% of my salary), and then my company matches it, so 10% goes into an RRSP every month. I had a second job a few months ago, but I got a raise so I decided my free evenings and weekends was worth more to me than the extra couple hundred bucks a month. And since I got the raise, the second job wasn't really necessary to pay my bills.

I bought a condo with my boyfriend last fall, our monthly payments are $1000 (includes land taxes) and condo fees of about $182. Since we both make about the same, we simply split the payments right in half, and that seems to work out.

After all my fixed expenses are paid at the end of the month, I am left with about $1130, which seems like a lot to me! But at the end of the month, I am always left with NO money, and forced to dip into savings. After 6 months of resorting to savings, my savings account is depleted and I am yet again stuggling like I was in University!

I have a 25 year mortgage of $171,000 and new car loan of just over $18,000 over 6 years, which I pay pay very low rate of 1% on both. I have a student loan that I will pay over the next 10 years, $276/month at 5.5%. I have a credit card with a balance of $2000 at a rate of 12.25%. I lived for years without a credit card, and then I got one to keep for "emergencies" (car breaks down, etc.) but I have used it 100% for things I don't need and 0% for emergencies. My mistake! I want to get that sucker paid off and cut up, I don't need it!!

My boyfriend and I just set up a TFSA for an emergency fund, we only contribute about $30 a month total to this fund ($15 each), but I thought it's better than nothing! I also set up my own, which I set aside $30 of my own money each month.

Right now I have no savings, a small emergency fund (a couple hundred bucks) and debt that I can't seem to get caught up on. I don't want to be paying my student loan for the next ten years, so I am considering moving the loan and financing it through the bank I work at, where I can get a 1% rate on it. My payments would increase about $100/month, but I could knock a few years off the payback. I read your blogs and other questions, and I just don't know where to start! From your advice, I need 6 months essential expenses saved in an emergency (about $7000) plus the goal is to be debt free in 3 years. At that rate, I would need to make over $4000 extra a month...I wish! I just feel so overwhelmed and have no idea what I should be paying down first, or saving for, or how much...

I figure at the end of the month, after ALL my bills are paid, and minimum payments are paid on all my debt, I am left with $380 to do whatever with. So what should that whatever be? Pay down debt? Save more for RRSP? Save for emergency? Or save for things like planned spending like vacations etc?

I have considered getting another job again, but I know from my history, the more I make, the more I spend. I feel like I am digging myself further into a deep hole of debt and the more I make, the worse it seems to get! Please help...what should I do first?

Name Withheld

In all of this you never mention a budget. Do you have one? If not, it's time to make one. then you have to stick to it. So if you decide to allocate $200 a month to fun and frolic, that's all you spend. This is where the jars work so beautifully: once the money is gone you have to wait until the following month to start paying for play again. Course, you can always do stuff for free. there are loads of free things to do that are heaps of fun, especially when you're in love. 

It sounds to me like you have a spending problem, and I think that you're right: the more you earn the more you will spend. 

1. You're doing well on the savings front for the long term with your at-work retirement plan. Now you need to boost your emergency fund and start setting aside some money for a goal you want to achieve. Maybe you want to travel. Maybe buy a beautiful new outfit. Whatever it is, you need to be able to defer today's instant gratification for tomorrow's big "yeehaaa!" Make a chart. Decide how much you'll set aside each week/month for your goal. Draw boxes to represent how long it will take. (Need to save $1,000? Doing it at $100 a month? Then you'll have 10 boxes.)

2. Move your "savings" where you can't touch them. Open up an online savings account and have the money auto-debited from your regular account to savings every month. DON'T TOUCH IT!

3. You need to figure out what the spending is doing for you: giving you a rush? calming you after a tough day? making you feel better about how hard you work? Then you need to CHANGE your BEHAVIOUR. Find something else to do instead of shopping/spending. This is a growing experience. It'll take some time, but it will be well worth the effort.

 

Hi Gail, I'm going to apologize in advance for the length of my question. I appreciate  the time you take to help so many people with their financial troubles.

My boyfriend (of 5 years) and I live together with our 8 month old son. We just moved into a new rental which is $1100/month incl. hydro, water, etc.  So we are now saving $200/month there and have switched our cable/phone services to a bundle package.  I believe we have a large amount of debt (especially for our income & our age - we are both 23) which we have accumulated over the last 5 years. We have managed to pay off a # of our credit cards.  But Our debt remains as follows:

His (rebate rewards) Visa: $3,835.60 (19.5%)
My Visa: $2,773.04 (19.5%)
My Line of Credit : $13,350.26 (9.5%)almost maxed out...max is $14000
Wells Fargo Loan: ~$5000.00 (had taken this out to consolidate a # of our old credit cards)- I believe it is at 21%-they don't show this or the balance owing on their statements!
Our chqing acct is at -$2000.00 (our full overdraft allowance)
For a Grand Total of: $26958.90!!
We have $0.17 in our savings account :(

The line of credit is equally ours, just in my name as my boyfriend was just starting up his business & had no documentation to back up his income...we used it to buy a reliable vehicle...and then for regular maintenance on the vehicle and then for...well...random things...and lately we have been having to use it & our credit cards to cover our rent & to pay some of our bills...including our credit cards! Downward spiral, here we go!

My boyfriend's job is in the construction industry and work has been on and off for the last 2 or so years. We had a business, but had to close it as our expenses were greatly outweighing our income.  He has no steady income, it could be a $500 chq (or less) one week and then the next pay could be $1100 (or more). He was injured 3 years ago (right after starting our business) and was off work for about 4 months...ever since then we have been going down hill & at a rather fast pace. I am on maternity leave & am making $1753.40/month (including my Child Tax Credits).

Should we consolidate it all & get rid of the credit cards and go for the loan...if I remember correctly it would be at 19.75%.  She [a bank advisor] said they wouldn't up our line of credit, which would have been wonderful at the 9.5%.  Should I lump it all in and go for it? Should I keep the line of credit and just get a loan for the rest of our debt?  

PS> I have worked out a budget using your Interactive Budget Worksheet (guessing at my boyfriends net income at approx. $1050/month & the debt repayment amount of $650) and can't find any money left for entertainment & clothes/gifts.  I am not a spender and even borrowed maternity clothes during my whole pregnancy. We never have $ for clothes & usually use our credit cards for gifts & entertainment...not smart, I know.

Name Withheld


I would not move from a source of credit at 9.5% to one at 19.75%. That would be an act of financial suicide since your interest alone would jump to $444 a month! Here's what you have to do.

1. If you want to get your debt paid off in three years, you must make the commitment to putting $214 (interest) + $750 (principal) for a total of $964 a month to your debt. 

2. If your breath just caught in your throat, I completely understand why, but that's what it'll take to become debt free. You've used credit when you should not have, and you have debt that far exceeds your current ability to repay. You must now do whatever it takes to get rid of that debt. If you can't then bankruptcy will be the only outcome. Yes, you may stay afloat for a couple more months, but you're on a sinking ship.

3. If you're determined to get out of this mess and get to a place where you can have a life, then you will both do whatever it takes to come up with the $1,000 a month you need for debt repayment. More gets you to debt free faster. 

Sorry, love, no easy way out. Now you'll have to decide if you both have the backbone to do this.

 

We had our first child in January.  We receive the $100 childcare grant from the Canadian Government.  My husband and I would like to put that money away for my son.  Is it better for us to open a tax free savings account for him or an RESP?  Is one better than the other?  We want to be able to have some money for him, so he isn't saddled with student loan debt (or like his father and I...had to work a couple of extra jobs to pay for it)

Name Withheld  
      
He can't have a TFSA because he's under age. Besides the RESP will earn him grant (CESG) money, so it's a better idea.