December 2010 Questions & Answers

 

 


Janine wrote:
Hi Gail...first time poster...long time fan...I started watching your 'Til debt do Us part'  show in 2008...not because of Us being in debt...but because I knew (my DH and I) had a great incomes ($150,000 combined...which we draw from our small business) but blow money on crap...we do save 10% for RRSP's,Mutuals, and RESP's. I guess my question is...as our mortgage will be paid in full the year 2015...we are really thinking of building a vacation home...Starting next month(may) we are putting $900.00 a month away for the remainder of 2010 and starting 2011 we are stashing away $1400.00 per month...so that in 2016 we will have a stash of cash to realize of dream...the cottage by the lake...we honestly thought we'd be 55ish when starting this...not in our thirties...what do you think? Is it silly to start this dream? Thanks so much...I preach your greatness to everyone...I'm known as...the crazy budget lady...Janine         

Gail says:
How can it ever be crazy to fulfill a dream? Girl, you and your boy are doing so well. If you stick to your plan, you'll have a goodly sum to get you on your way. Keep in mind that the 10% rule is just for retirement planning, so you may need to add a smidgeon to your budget for the kids' RESPs on top of that. And I hope you have a healthy emergency fund too.

Sometimes when you are as focused as you and your DH have been, you can achieve wonderful things. Revel in the planning, the dreaming about the new place you will build for your family. Make sure you squeeze every minute of joy out of the waiting. I find we've lost the ability to anticipate with joy. We want everything right now and have forgotten how lovely the waiting can be as we play with the images in our heads, talk about what we want, collect pictures and build the vision. Don't skip this part.

 

Angela wrote:
Hi Gail, Since I picked up your book 3 months ago my life has changed. I have recently come out of a divorce so am starting over financially (ex had horrible gambling and money management issues).

I have done up a budget using your online guide, and I have $1450 left over each month. My yearly income is 130,000, I only have just started putting away an emergency fund and am contributing $300 per month, I also put $250 a month into RESP for my children. I owe $23,000 on a LOC and $179,000 on a mortgage. Since the interest rate on my LOC is lower than my mortgage I was planning to put the bulk of the "leftover" money every month directly on my mortgage since it is my most expensive debt and I would like to have it paid off by the time my oldest leaves for college.

Here's the dilemma, I watched a show on TV last night and it was on emergency funds. She said the priority should be the emergency fund and to sock away 8 months worth of income before paying down the debt. So now I'm confused!! I know you feel emergency funds are important too, especially since I'm a single mom (I'm supporting the ex for the next 5 years too).

What should I do...how do I split the money up?  
      
Gail says:
You should use any extra money you have to build up an emergency fund. You need to have at least six months' worth of essential expenses. If you would feel better with 9 months or 12 months because you are a single mom and supporting your ex, then you can make that call. As for what debt to pay down first, if you're going to pay down debt focus on the LOC. I know the mortgage debt is a bit higher in terms of interest costs, but the LOC is susceptible to changes in interest rates, and they are going to go up. Pay that sucker off as quickly as you can. Then you can focus on your mortgage. 

 

Trish wrote:
I have been married for 14 years, in debt for most of it, if not all.  Recently we got help from Credit Solutions Can. (debt is about 65,000.) we were paying $1,500/month for approximately 5 yrs  till they messed up and we went and did a consumer proposal which is now $1,100/month for approximately 5 yrs as well.  The problem is now we are overspending just with our payments for cars, mortgage and just everyday life, that we are still struggling. We spoke to the advisor and he said there is nothing he can do we just have to keep going; but we will then get out of this debt and still be in debt because we can’t seem to catch a break. My question to you is how is it that on your show you get people out of debt in less then a year with higher debt then what we have?? Am I missing something?  Is there something you could do to help us?  
      
Gail says:
It doesn't matter where you go for help, if you don't figure out what you've been doing wrong, you're never going to get out of trouble for very long. One reason I'm against the instant solutions that credit counselling and debt management companies offer is exactly what you're describing here: the behaviour that got you into trouble doesn't change. The debt isn't the only problem; it's what you've been doing to get into debt that's the bigger issue. You say:

The problem is now we are overspending just with our payments for cars, mortgage and just everyday life, that we are still struggling.

Honey, you're living too large on your income. It's that simple. If you want to get out of the mess you're going to have to make some tough decisions: get rid of the cars, sell the house, trim everything but the most essential spending out of your budget. It may take a year or five to get back into the black, but you can do it. If you can't in five years or less, then you should be seeking help from a bankruptcy trustee.

Go and borrow my book from the library. Do the hard work. Yes, you may cry, but they'll be good tears because it will mean you're finally waking up. 

 

K wrote:
I watch 'Til Debt Do Us Part on Slice all the time and was so happy to see it picked up by CNBC!  Now, despite your wisdom and my intelligence (or so I hope), I am stuck between a rock and well...a rock.

Including consumer debt (one credit card and a consolidation loan), family debt (loans from Mom and Dad) and a car loan, I currently have about $29,000 in debt.  Despite making payments in full and on time, budgeting and cutting where possible it feels like it's taking forever and I'm definitely feeling the "debt fatigue" you speak of.  Because of my income (a paltry $26,000/year), I'm really not able to pay any more than I'm currently paying.  While I have considered other professions, I really love what I do and it has been a hard-fought battle to find work that I enjoy.  I have also explored the option of credit counseling or bankruptcy but both seem to negate my responsibility for creating the mess and leave me in worse shape than I'm already in.  Aside from getting a new job (which would break my heart), do you have any suggestions?        

Gail says:
Okay honey, you've identified the problem: not enough money to deal with the debt. And you've clearly stated that you love your job, so you should keep it. But you may have to get another one -- on weekends, in the evenings, whatever will work with your current job -- and devote all that income to debt repayment. You have to get out of the hole and you must do whatever it takes to achieve that end. $29K a year is NOT a lot of income. And if you have debt, it'll always be a struggle. It may take a couple of years of busting your butt working long and hard, but you'll come out the other end being able to do what you love without the burden of debt making you question your career decision. Start by paying off the debt with the highest interest rate first while you keep your consolidation loan in good standing. You can do it. I know you can. So DO IT!

 

Sharon wrote:
I learned about you and what you do after watching your great show! I hope you can offer me some advice. My husband and I have a 2-year old and would like to eventually buy a home. He works full-time and I work for my design company from my home office. My income fluctuates and I'd like to know how we should approach building a budget. I tried using an average of my monthly income, but this still doesn't seem right.  We don't have any credit card debt (only my student loan). But we don't have savings (other than retirement). I'd really like for us to be able to change our spending habits (be responsible) so that we can meet our goal of buying a home. I know a budget/spending plan will lead us in the right direction. Any advice you can offer is greatly appreciated!

Gail says:
First off you should take a hug for doing so many things right: no consumer debt, saving for the future. And I applaud you for seeing that you need to have some other savings – like an emergency fund – as part of your financial plan.
Like many people working with a variable income, you’re finding the planning part tough. Here’s what you should do:

1. Assign all the essential expenses to your husband’s income. So make a budget – we’ll call this Budget A -- for his income that covers the parts of your spending you have to do every month: housing, transportation, food, minimum debt repayment. You get my drift. If he can’t carry these essential expenses on his own, you may have to cut back on some of these costs. Alternatively, you can figure out how much you make a month at a minimum – so not the average, but the least amount you make in any given month – and assign the minimum amount to Budget A.

2. Make a separate budget – Budget B -- for the non-essential budget items: clothing, entertainment, holidays, gifts and the like. This budget will also include your savings.

3. Allocate your remaining income to Budget B. If you hit a particularly dry month, your essential expenses will still be covered. When you have a very good month financially, you can catch up the categories in Budget B that may have suffered previously.

 

Chris wrote:
Hello Gail, I am 25 years old and live on my own. I am working full-time and have a huge student loan and two credits cards. I am trying to figure out how I can manage to start paying everything off? Would you suggest consolidating it all into one loan? I feel like I am going to be paying the minimum payment forever. Help!!! Thanks!

Gail says:
If you are only paying the minimum on your student loan and credit cards, you’ll likely be making those payments for at least ten years. Those minimum payments are designed to do three things: lower your monthly payment amount, make you pay gobs and gobs of interest, and keep you in debt for a good long time. If you want to get out of debt then follow these steps:

1. Divide the principal you owe for each debt you have by the number of months in which you wish to have the loan paid off. So if you want to pay off a $15K student loan in 36 months, you'd come up with 30,000 / 36 = 417.

2. Add that to the monthly interest cost. So if your $15,000 student loan is at 6.5% your monthly interest would be 15,000 x 6.5 / 100 / 12 = 81.25.

3. Add the principle and interest together. You would have to make a monthly payment of $498.25 to achieve your goal (approximately). Since interest is calculated on a declining balance you'd actually hit your goal a smidgeon earlier.

 

Joanne wrote:
We are soon moving to our third home (last one for a long time). We have the 20% downpayment to avoid CMHC fees. We want to try and pay down our mortgage as quickly as possible, without being house poor and factoring in the new cost of daycare that we will soon have.

We are looking at different rates, years and amortization periods. Is it better to: a) choose a mortgage with a shorter amortization period (20 or 15 years), or b) choose a mortgage with a 25 year amortization (so your payments are less) but overpay by $100-200 per month? Thank you.

Gail says:
Good for you for having 20% down and for wanting to aggressively pay down your mortgage. You’re wise to not strap yourself too tightly. As for whether to choose the shorter amortization or make extra payments, let’s look at the black and white of it:

Let’s say your mortgage is $250,000 at 5.85%. If you choose a 20-year amortization your monthly payment would be $1760. If you choose a 15-year amortization, your monthly payment would be $2080. If you choose a 25-year amortization, your monthly payment would be $1,577. Now you have to decide how much you think you can consistently afford to pay while you meet your other needs and leaving yourself a little breathing room.

There are loads of mortgage calculators on the web that you can use to run your own numbers and I encourage you to do so before you make a decision. If you think the 15- or 20-year amortizations would create payments that would squeeze your budget, then go with the 25-year amortization and make the extra payments using the annual prepayment privilege.

 

Laura wrote: 
I just completed your Build a Budget work sheet and I have just one question.  I have $800.00 per month that I have designated for the Emergency Fund and Savings.  Should this be split evenly and put $400 in savings and then $400 in an emergency fund?  Or should I be putting more into savings ie $600 and $200 into an emergency fund?  I don't know if this makes a difference or not but my husband and I are both in our early 40's.  The $800 represents 13% of my budget.  Thanks.  BTW love the show!

Gail says: 
Go 50/50 for now until you get a good stash built up in the emergency fund, then go 25/75 to build up your retirement savings.  When you hit your mark on the emergency fund (six months' worth of essential expenses), have some fun!

 

Margaret wrote: 
So I get the whole dollar cost averaging benefits, but what should you do if you have a lump sum, say from an inheritance, to invest?  Should you just split it between equity and bonds?  Or can you judge the market and time the investment to your advantage?

Also, is it true in Canada, that if you get an inheritance and you keep the money in a separate account and never intermingle it with other join money that it will not form part of any separation of equity?

Gail says: 
Whether your dollar-cost averaging or putting a lump sum into the market, the issue of what to invest in depends on a couple of factors or three:   how knowledgeable you are, how much time ‘til you need the money and your investment risk profile.

I have several articles/blogs on investing on my site and you should read those.  I also have a new book, Never Too Late, coming out in Jan that will guide you through the process.

As for your second question regarding inheritances, you're absolutely right.

 

Melissa wrote: 
I have been in a very secure relationship with my boyfriend now for 4 years (lived together for 3 and a half) we are both committed fully although not married.

We are in the midst of buying our first home together and with his flawless credit history and my slowly recovering one, we thought it best to put the mortgage in his name only.  This worries me cause even though I have no plans of ever leaving him, I want to know how I would go about to getting my name on the house and or mortgage, without making my boyfriend feel like I’m marking my territory to take it with me when I leave.   Please help in anyway you can.   Melissa Niagara Falls Ont.

Gail says: 
In a divorce in Ontario, the matrimonial home is treated differently from other property regardless of whether or not you are on title.  As long as you live in the home at the time of separation, no matter what, each spouse has an equal right to possession of the matrimonial home.  If only one spouse is on title to the house, then that person is entitled to keep the house (because it’s in their name), but they must pay the other party 50% of the value of that house on date of separation. However only legally married spouses can make a claim like this.  If you are not legally married, you must make a claim under constructive trust for a portion of the value, although the value is almost certain not to be as much as 50%.

Once your credit is all cleaned up, you should both be on title.  Tell your life partner NOW that this is important to you -- it's not about the money, it's about sharing a life together -- and set the date for the "joint title" just like you would for a marriage.  It'll be something you work towards together.  If he hesitates to put your name on title, stop contributing to the mortgage payoff.

 

N wrote: 
I am so going to be in big trouble, I am on Ontario disability, single parent, and my son is about to turn 18 in Nov.  He will be going back for the 5th year at high school in Sept.   At which time I will receive much less income about 600.00 a month less.  Then come June of 2011, I will get even less.   I am sick to death with the worry and stress of what this will do to me.   At this time my son has no plans to move out when he is finally finished high school, and I will be in an apartment that I will not be able to afford.  We live in a small town and it will be hard to find an apartment that I can afford and that is on the ground floor.  If you have any suggestions I will use them to the best of my ability.

Gail says: 
Okay, chick, you've got to breathe.  I can hear the panic and sense the out-of-control.  So let's look at this one step at a time. 

1.  You're on disability income and it will be going down by $600 a month shortly.  So you either find a place to cut back $600 a month, or you find a way to make $600 a month.  So go over your budget and see what you can trim.  And then look for ways you may be able to supplement you income.  Can you do any work at all?  Are there other resources in your community that can help you? 

2.  Your son has no plans to move out.  That's good since he can become a contributor to the household and help you cover the rent once he's done school and gets himself a job.  In the mean time, while it may be hard to find a new place to live (I too live in a small town and know the options are fewer) you must keep your eyes and ears open.  Perhaps you'll need to consider "shared" accommodations.  Two people who have a small income can live more comfortably together than alone.

 

S wrote: 
I am having a tough time convincing my parents that the time is right to rent. I have been finished school for a year, moved back home to the suburbs and have found a job working in Toronto's financial district for roughly $50k gross a year. In the past year I paid off all my OSAP, I am debt free and have roughly $10k in my bank account.

Although I understand that I can save for a house quicker by staying at home, my life is in Toronto now including my job, friends, and girlfriend who is 25 and owns a one bedroom condo. The relationship with my girlfriend is moving fast and she has questioned my ability to be independent before taking this too far by being away from my mom's cooking/ laundry before settling down with me.

Although I agree, that staying home and saving is a wiser decision, I still have budgeted to save $1000-$1200 dollars per month. Factor in when I go to purchase my own house that I am combining the assets of another person I feel I will be stable.

Although moving out comes with a lot of responsibilities, I am 24 and feel that the time is right and that this is a stepping stone to being independent and that I am not throwing my money away. I look forward to your thoughts if you believe this can be a wise move.

Gail says: 
There is nothing wrong with living at home if that's what you want.  And you can live at home and be very independent -- making meals, doing your own laundry and contributing to the upkeep of the family -- while saving money for a home of your own.  But living on your own also brings important lessons in independence and it sounds like you may be ready to start this journey.  If you are debt free and have a very healthy emergency fund then it may be time for you to spread your wings.  Since you will still be able to put away a healthy amount of savings, that bodes well for your future too.  Have you made a budget that you're prepared to live with?  Do you have the systems in place (a spending journal, budget spreadsheet, etc.) to manage as you move into life on your own?  Do you have some money for the stuff you will need to buy for yourself in setting up your own home (you can't use your emergency money for this)? 

I understand that your girlfriend wants to see a man able to stand on his own two feet; nothing is more scary these days that the thought of having to "mother" a partner because he just won't grow the hell up.  But this should be a decision you make based on what's right for you.  If this is right for you now, then do it.