July 2010 Questions & Answers

 

 

 

 


I have about $24000 in student loan debt. I am getting married next year and have saved $14000 for this and plan on staying on budget. We are also saving for a down payment. I'm currently paying $100 over the minimum on my debt because I want to save for the wedding. Once the wedding is over, I will increase my payment to pay off my student debt.

My question is, how negatively will my current financial plan be seen from a mortgage brokers point of view?

Name Withheld

Why would your plan be seen negatively at all? You're currently paying more than your minimum on your debt, with a plan to pay substantially more after the wedding. You're saving for the wedding before you spend, and staying on budget. You have a plan. Once you're done with the wedding, you can up your student loan repayment amount and start saving for your downpayment. Hey, I think you're doing fine. Keep it up.

 

My husband and I need your opinion to settle something.  He has one bank account that has high fees which we use frequently for his paycheque and some bills. We have a joint account elsewhere with low fees.  This account is connected with our line of credit so that when money is deposited it is automatically transferred to reduce any outstanding balance on our line of credit.

I would like to change all of our banking to this account with lower fees because I feel that it will keep our interest costs lower due to the money automatically transferring over and we don't incur extra charges for debits and payments every month like the other account.

My husband finds this account very confusing and doesn't like that his cheque would automatically transfer so we would be in the negative (until we pay off the line of credit).  He would like to just open a different account at his other bank with lower service charges (but they would still be higher than our joint account).

We are trying to find ways to lower our fees every month and would like your opinion as to which way we should go.

Thanks!
Name Withheld

Your account tied to the line of credit is the smarter account to have, providing you are living on a budget and not accessing the line, but paying it down every single month, no ifs, ands or butts. I've even blogged about just what you're describing, so go read this: http://gailvazoxlade.com/blog/archives/263. Anything that reduces fees and interest is a good idea in my books, but you must be disciplined to have this work for you. If you're not, you'll be in a deeper hole in no time flat. 

 

Hi Gail, I have a dilemma that i hope you could provide some insight into. I am a year away from being married and i have been with my common-law partner for over a decade. Together we have a home and with that a mortgage. He has no debts but my investment into education and family car as well as a weight loss surgery i had a few years ago have set me back approximately $55,000. I earn approximately $45,000. With daily living expenses, it's really hard to keep up. I went to the bank and spoke with the Manager today. They insist that a secured line of credit (second mortgage) is the best way to go. They estimated it would take 92 years to pay down my debts. I have excellent interest rates (prime + 1) with most of my creditors. These debts along with the wedding planning is keeping me up at night. I always pay my bills and my credit rating in spite of these debts is excellent.

I am considering filling for bankruptcy, which is one of the hardest decisions for me because i pride my credit so much. The debts i have are not because of frivolous spending, it's because i don't make enough to pay these debts down. I am not sure if i qualify for bankruptcy but i feel like either way i'm stuck. Do i continue to make minimum payments to keep a good credit or start off with a clean slate? One of my line of credits which i have always and only paid interest on; in the last 5 years i have paid $10,000 in interest alone. Please help, i'm at the end of my rope.

Name Withheld
      
You may very well have to declare bankruptcy. But you need to know that unless you've been out of school for seven years, the student loans won't be discharged. I recommend you see a bankruptcy trustee because the assets you have in your home may be at risk if you do declare bankruptcy, so you need to be informed before you make your decision. Consolidating to your mortgage may also make sense, but that puts your partner on the hook for your debt too. Go see a trustee. Learn what you need to know to make a good choice.

 

Hi Gayle, I am a big fan of your show and staying home and watching it on a weekend night also means that I am not out spending money on needless things! It has also taught me about fixed and variable spending and how I might better control my finances. I did have a look through some of the archived questions, and although I admit I didn't read all of them, I did read a few and didn't come across an analagous question / scenario.

I am a single mom of a four year old girl. I have been separated for a little over two years and have lived with my parents since that time. Prior to that we were renting so I did not have any equity built up in a home. The whole idea in living with my parents was to allow me to pay off some debt and get on my feet. I feel I have been quite fiscally responsible in the past two years, although living with my parents allows me and my daugther to have some privleges in life that we wouldn't have otherwise. I make $60,000 a year (gross) and I have paid off approximately $25,000 in debt in the past two years. All of this borrowed money was for educational purposes, as I completed a Masters degree in England several in 2000 and the international student fees were very high. I still have $12,500 to pay back on a student loan. I am diligent in making minimun payments on this and always have been. This is the last outstanding loan I have. In addition to that I also have a car payment of $353 per month, child care expenses of around $600 per month, along with car insurance, acumulating some savings and contributing to an RESP, you can imagine that my money is distributed many places. Even though I live with my parents and do not have a mortgage, I still feel a lot of anxiety about going it on my own. On one hand, the desire for independence is overwhelming but I am very scared to get myself into a position where I am house poor and really in over my head. While I don't 'spoil' my daughter, I don't want to get myself and her into a lifestyle where I can't afford the things I can currently do for her.

Firstly, I wonder if it is better for me to pay off the $12500 I have left on my loan before I even consider house hunting. Secondly, I am uncertain about what I can afford house-wise. I live in St. John's, Newfoundland and although when compared with the national house prices, it is lower here, the market has gone a little crazy here in the past couple of years and prices are climbing. I know that I can get approved for a mortgage but I really don't 100% trust what the banks are telling me I can afford as they don't take into account all the other expenses I have.

Additionally, I have started keeping a monthly spread sheet of everything I spend so that I can keep a really tight reign on  where some of my weak points might be. Are there any other tips you could give me to monitor my  finances efficiently and is there is certain percentage of income you could recommend is advisable to spend on variable expenses monthly? Do variable expenses include things like  groceries and gas?

So I digress. I guess this has turned into not so much a question as a detailed description of my financial scenario and the uncertainties I have about becoming a home owner. I have done tentative budget after tentative budget on what I might afford if I bought a house but I really feel I need the input of an expert.

Kind Regards.
Name Withheld   


Good for you for being so diligent with your debt repayment. I  hope you're doing lovely thing for your parents and appreciating what a gift they have given you. You're a lucky girl to have such supportive folks. Now on to your questions.

• Since you're "very scared to get myself into a position where I am house poor and really in over my head" then making sure all the debt is gone before you start house hunting makes good sense. It will also allow you to take two other important steps:

1. Build up a healthy downpayment and
2. Let you practice living on the income you will have when you finally do purchase a home of your own.

Go and read: Ready for Home Ownership http://gailvazoxlade.com/blog/archives/476

You're right not to trust the lender to tell you how much you can afford to borrow. Lenders routinely over-lend leaving borrowers struggling to make ends meet and have any kind of life. I have a whole section on home buying on my blog, get busy reading that.

I don't have a recommendation for what to spend on variable expenses. Have you used my interactive budget? That might help. 

 

My husband and I love your show. I have seen a lot of the episodes and even know some of them by heart! We have tried to take your advice to those couples and implement it into our lives and on some things I would say we have succeeded.  One area of struggle which seems to be our downfall is the cash aspect of it.  We tried the jars...loved it, but found that we would not always have the cash when it was needed. By the end of the first month I had most of the cash left and everything was put on our card. We live outside of the nearest city and commute to work everyday. That part works out but if something comes up that is urgent and in need of payment, we don't have the cash with us. Also, to carry around large amounts of cash is not the best either.  What do you suggest that we do to keep on our budget with not being able to access the cash right away? We really want this to work as this is our last chance to make it happen. Any advice would be greatly appreciated!

Thanks!  Tashia  
      
Tashia, some people find that the jars just don't work for them... as you do. Consider using the 'notebook' system. You would leave the money in the bank, but set your limits in a notebook, and use only the limits you had set. So, for example, if you set a limit of $60 a week for transportation, when you'd debited to $60, you'd have to stop, or borrow from another "jar" on paper (say your clothing "jar") until you could replace the money. Let me know how that works for you.

 

My parents, who are both retired, have fallen victim to the old Timeshare trap.  Not just once, but twice!  They are paying maintenance fees and property taxes on both properties each year.  While they have been making use of the timeshare in St. Thomas, they haven't even used the one in Florida and they've owned it for 5 years.  Is there anyway to get them out of these commitments or to help them recoup some of their expenses?  They've tried to work with some companies to sell it but they've just been scammed out of more money.  They require payment upfront for a title search and then they never hear from them again.  We've also tried to sell or rent them online with no success.

Any advice you can offer would be appreciated.  

Name Withheld

I'm sorry m'love I don't know anything about timeshares. They've always seemed like a bad idea to me so I've steered clear. I will say that will the correction in the real estate market in the U.S., I doubt you'll have much luck selling at this point. Is there a way for them to "rent" it so they can at least cover their costs? 

 

I am 25 years old and currently living with my parents. They are not charging me anything for room and board. I was paying off my student loan and am now debt free. I really feel like I need to move out of my parents’ house as soon as possible. My mom does not want me to move out. I don’t know if I can really afford it. I work two jobs and spend a lot of time waiting until my other job starts. I also stay overnight at my grandparents house at least 2 nights a week to save on travel time and gas. I feel like I live out of a suitcase and don’t belong anywhere. I currently make about $2000 net per month. I have been saving everything that I make minus a little bit for expenses. I have about $10000 saved right now. I don’t have any money in RRSPs. I want to move out as soon as possible. I don’t know if I should stay at home and continue to save for a down payment to buy a condo or if I should find a place to rent and move out sooner. My income cannot change much for the next 3 years since I need to be close to family for various reasons and there is not much demand for my profession in this area. If I only plan to live where I am for about 3 or 4 years would it be better to buy or rent? After about 3 years I would be likely moving overseas for an extended period of time. Basically how much money should I have saved before I move out and should I buy or rent a place to live?         

Name Withheld

Well, m'love, you certainly have a lot of questions. 

1. You don't make a lot of money, so managing on your own will take some juggling.
2. If you plan to not remain in the area long term, you should NOT buy. 
3. Look for somewhere to rent where all your costs (rent, utilities, apartment insurance) take no more than about 35% of your income. Based on your current income of $2,000, that would be a maximum housing cost of about $700. Since you're debt free, you could actually go a little higher using as much as 50% of your income for housing... so $1,000 a month... but that means you won't have a lot for things like planning for your future. If you can't swing a housing cost of under $1,000, you probably can't afford to move out unless you have a roommate to share your expenses.
4. Based on the life pie, if you spend 50% on housing, you'll have 15% for transportation ($300), 10% for savings ($200) and 25% for life ($500) which will include your food, entertainment, clothing, gifts, bank costs, medical costs, and everything else that's not housing, transportation, debt or savings.

 

Gail, I just found your show and started to record each one of them.  Love the show.  I have a double personality when it comes to money and saving.  I do the responsilbe thing by:  

1.  Maxing out my 401k (12 years running), $200,000
2.  Contributing to a Roth every year, $30,000
3.  Saving in my emergency fund $26,000
4.  Pre-retirement account $40,000
5.  I also have a pension worth about $1,000 every month when I retire at 62
6.  I only owe $56,000 on a house I bought for $300,000.  I pay an extra $200 on this every month.
7.  I also bought a rental and fixed it up myself for $116,000, I owe $86,000 and make about $300 a month above expenses.  I could sell the house for $175,000 if I ever wanted to get out of it.
8.  I have college funds for each one of my children, $3000 in each of their accounts
9.  I have between $300 to $1,000 in my budget every month to either save or pay down my home loans with.
10.  My wife is a stay at home Mom so we only have a single income, which is why we bought the rental.
11.  We have never had any type of balances on our credit cards.

Here is the bad part.  I want to get rid of my perfectly good 2001 Honda Accord and buy a sports car.  The car costs $43,000

My wife thinks I'm crazy but I've wanted this car since I was a kid.  I'm currently saving up for the car on a monthly basis to get a sizeable down payment of $10,000 to $15,000.  I'm torn with this decision because I don't like spending money on vacations and would rather spend money on something I can enjoy on a daily basis and keep as a collector car.  Any advice would help since I don't feel like things are out of control but this sounds like the spending you tell people to avoid.  My arguement to my wife is that you advise people that spend before save and that I save before I spend.

Name Withheld

Hey if you want to buy a sports car and you save the money to get it while taking care of all the other business, I'm not going to tell you not to buy the car. Everyone spends money on something. If you're spending yours on a sports car, and all your ducks are in a row, then so be it. Your emergency fund could be bigger, considering you're a one-income family. And you need to get your wife on board with this since SHE is your life partner. If you can convince her it's a good idea, then your gold. If not, then you have to think about the implication of doing what YOU want to the exclusion of what's important to the family.

 

Hi Gail; Just a quick question for your opinion. I currently have a credit card with a balance of just under $8,000.  (I fell on hard times a few years ago.)   Each month I pay $300 which is more than the min balance.  Thankfully the interest rate is lower than most, at 11.9%.    I only use this card now, to purchase my medical items which are costly and I do not have that amount 'handy' to pay with cash.  As soon as I have the receipt, I send this in to my benefits' carrier and 90% is paid back to me within a few days (usually less than a week).  As soon as I have the funds into my account, I make a payment towards my card, but always a bit more than what the actual medical item had cost me.    I do not use my card anymore, other than for my medical items.

I'm wondering, would it make any sense at all to get a second card (I know you just shuddered), to use only for my medical supplies, which is being paid off within a week or so, so that I can focus on my current card to make the monthly payments and work to get it paid off without it still being 'active' with my medical purchases?   In my head it sounds like it makes sense, but it may not make a difference at all... I'm uncertain. 

Stacey 

Getting another card will not benefit you in any way. You don't say how much you're currently putting on your card each month for your medicine, but you should know that $79 of every $300 payment you make is going directly to interest. So deduct the amount you're currently charging each month for your drugs from the remaining $221, and you'll see how much you're paying off. Divide that amount into your balance, and you'll see how long it'll take to get it paid off. I suspect you're simply not paying off enough each month. 

 

Hi Gail, Love your show and the site - lots of wonderful information & great reminders for staying on track. I've searched the site and couldn't find any information already answered regarding what to do when aging parents have racked up debt - who is responsible financially when they die?

My mother is in great financial shape - I learned a lot from her early on - she's several years into retirement with lots of savings & investments, and certainly more than enough to see her through her final years fairly generously. And yes, a will and all paperwork in place with meetings held with the family as to her wishes...

One of my husband's parents is on the other end of the spectrum - retired with no pension, no savings, and continuing to accumulate debt. There is a lump sum from a property sale currently keeping them going, but this is fast disappearing and all advice from family to budget, save, invest, and PLAN seems to be met with resistance and an insistence on 'living for today'.

My husband and I are debt-free, with some good savings and investments. We are becoming increasingly concerned that this parent will be facing a poor quality of life in another few years, but because of our disagreement over how things have been handled, feel reluctant to 'bail them out'. Beyond that, when they do pass on, will their accumulated debt be transferred on to the children?  There won't be anything in the 'estate' to cover the debts.

Any information or resources you can provide about how this works in Canada - responsibilities for debt after a death - would be most helpful. THANKS!!

Name Withheld  

Debt cannot be "passed on" to heirs. As long as you don't "sign" for your parents (so don't co-sign or be named on their debt in any way), their debts are settled from the estate. If there is no estate the lender must eat the loss on the debt that isn't repaid. Sleep well. 

 

Lauri wrote:
I have recently become divorced, and now cannot even get a Sears Card! My ex and I had lots of credit together and a good credit rating. Now that we're divorced, why am I not able to get any credit? My family lent me the money for the house I just bought, so no mortgage is registered against it. The only form of credit I have is CIBC Visa card that I've had for about 20 years. I also lease a car through Toyota Canada - have done this for the last eight years, never missing a payment, or even late on one. Please help! Thank you, Lauri

P.S. I NEVER miss your show. It has taught me a lot, especially since I've been on my own.  
      
I can't imagine why you can't get a Sears card (though why you'd want one is beyond me since department store cards are the most expensive kinds of credit cards) if you have a credit card. Unless that credit card isn't being reported in your name because it was originally taken out under your ex's name. Very often women who divorce or are widowed find that all the credit reporting was done in their husbands' names and they are left with no credit history. Did you know, for example, then when you sign a loan application jointly, all the reporting takes place in the first signature's name? I suggest you get a copy of your credit history from equifax.ca <http://equifax.ca>  and find out just what's what. If you have no history on that card you've had for 20 years, it's not being reported in your name. Time to get yourself a secured credit card and start building your own credit history. 

 

Jessica wrote:
I need some advice...My boyfriend is in the middle of trying to get a separation agreement done with his ex. He had put 2 grand into rrsp's under her name. I have the statements showing he made the payments. She is saying it's her money and won't use it to pay for the lawyers even though that was the original agreement. Can he make her use it to pay or is he out of luck?   
      

Sorry m'love, once you put money into a spousal RRSP, it becomes the planholder's money. Retirement assets can be divided on separation, but that would entail equalizing ALL the assets, not just what's in the spousal plan.