March 2010 Questions & Answers

 

 


Hi Gail: In the past ten years my financial situation has not been great. However, I feel that I just made the biggest mistake. The reason being is in the past six months I filled for what I thought was a debt consolidation proposal but in the end it was proposal which was approve but if i miss at least three payments it will be a bankruptcy. I went to a credit agency, now I feel that it may not have been advise wisely as I told them that I had previously I had filled for 2 bankruptcies, one has been discharge. My question is would I ever be able to fix my credit and be able to buy a house?

Name Withheld

Your mistake is that you haven't changed your behaviour despite having filed for bankruptcy twice before. You are clearly living well above your means, or you are simply not making enough money to make ends meet. Regardless, if you don't change your behaviour, you're going to be a very unhappy person for a long time. As for whether you would be able to buy a house, my question is "with what money?" You're not able to manage your expenses now, a home won't be cheap, and there are loads of expenses attached. Do you have any savings? Since you're back in a consumer proposal, I'm going to take a guess and say, "no." Hmmm. I think you should focus on learning to living on a budget and build up some savings before you start worrying about things like buying a home.

 

Hi Gail, My husband and I are trying to figure out whether or not it makes sense to pay off the balance owing to our Township for the water/sewer levy. The original amount was just over $18,000. The $1625 annual payment is rolled into our monthly property tax payment and the principle attracts 6% interest, calculated daily - or, $2.10 per day on the current principle of just over $12,000. By the time our final payment comes around in 2026, we will have paid $30,000 on a $18,000 charge - ouch! The current balance is just over $15,000.

We don't have a mortgage, the house is owned free and clear, no credit card debt or other consumer debt. I created our budget using your online interactive budget (excellent, btw!). We have RRSP and RESP savings (contributing monthly to both) and almost $40,000 in other cash savings. However, we are currently an one-income family with 4 kids, 3 of whom are 4 and under and 1 teenager and I am currently on maternity leave, likely to remain at home until #4 starts school (he's only 9 months now though).

My question is, does it make sense to borrow from the line of credit (current balance $0), borrow from savings, paying ourselves back monthly, instead of paying the town and the interest charges or just keep paying the charge monthly?

Any advise or light you can shed on this would be so appreciated - we hate the idea of paying that kind of money in interest, but it's scary to think of depleting our cash savings by $15,000, while we're a one-income family. Any words of wisdom? Thanks again!

Allison

Allison, the answer requires a black and white calculation: if the interest the township is charging is higher than the interest rate on your line of credit, use the line of credit so you lower your interest costs. You have a pretty healthy emergency fund, which is terrific. Based on how well you are doing, you should be able to focus on that $12K in fees and get it paid of PDQ, particularly in light of the fact that you have no mortgage or other consumer debt. Just put your head down and get that sucker paid off as soon as you can. You might also want to consider using $6,000 of your savings to kick-start your debt repayment.

 

My wife and I have been married for just over two years. We have three kids under the age of 4 and only one income. We've just moved from Ottawa Ontario (my hometown) to Trail BC (wife's hometown). We just bought our first house in December 2008. I've been in commission sales for 3-4 years and since the purchase of our new house I've taken a pay cut of almost 50% since last year. We are only 23 years old and feel like we've hit rock bottom with our finances. We've accumulated approximately $40,000 debt...$22,000 high interest loans and credit cards. All this is outside our mortgage. We are not sure what the answer is, but have been considering credit counseling, consumer proposal, and even bankruptcy. We are hoping this is not necessary! We wonder if selling our house is an option, however, we feel that this might not be as we probably don't have any equity yet! I truly hope my wife and I haven't left this too long, but we are willing to do whatever it takes to get things sorted out financially in our lives! We have three beautiful children that depend on it! Your advice is appreciated!

Name Withheld

Let me get this straight: You're only 23, you have 4 kids, one income and you recently bought a house, and now you're $40K in the hole? OMG! Why have you been in such a hell-fire rush to do everything all at once? If you can't manage the debt and feed your family you may have no other option but to declare bankruptcy. I strongly recommend you see a Trustee in Bankruptcy and discuss your options before this hole gets any deeper.

 

First of all I want to say that I am a HUGH fan and watch your show ALL the time.
We are getting married in June 2010 and I am trying to pay off as much of my debt as possible. My question is...Should I use the money in my savings (5000.00 +) to pay off the balance of my credit card in full, or should I just keep making payments monthly. Not sure if I should keep the money in my savings acct. or pay off my card and start saving from scratch.

Name Withheld

I think it is very important in these uncertain times that you have an emergency fund, and so I would advise against using all your savings to pay off your debt. You don't say how much you owe, or how much you have saved for the wedding. You may work to put a push on in terms of earning some extra money right now to not only get that debt paid off, but accumulate some money for the wedding.  

 

Hi Gail, thanks in advance for your help. We are in the middle of a renovation that has gone horribly horribly wrong. We have 2 small kids, are living in a sublet until we can move in and are in a position of choosing to go further into debt than we had hoped or sell the house for less than it's worth and loose hundreds of thousands of equity. We've chosen the debt.

So, here's my question. We've got a LOC for $450,000 at prime, and a $40K loan at prime +1 from a family member. Not everything on the LOC is housing - $150K was the reno, $15K was personal (a car, our wedding etc.). We're about to start your jar system, but I don't know how much of this debt to try  and pay off in 3 years & how much I should call our mortgage... I'm on maternity leave and we don't want to live like paupers forever. What's a responsible time/amount for mortgage versus "debt repayment" for a house worth $750K if we bring in $115K/year? Total debt = $490,000 (OMG!!!)  

Name Withheld 
      
If the house is in fact worth $750K and your outstanding debt is $450K, call it all mortgage, and get a real mortgage as soon as you are able since the interest on the line alone is costing you pretty close to $900 a month. You make a good income, but not good enough to support that kind of debt... and pay it off in 3 years.

 

I have 4 credit cards. One of which i have had for 5 yrs and i have 3 new cards which have been opened in less then 1 yr. I made a mistake in accepting these 3 cards this past year so i would like to know the following:

Would it hurt my credit score by cancelling them?
Would it hurt my credit score by not using them?

Name Withheld
  
Yes canceling cards hurts your credit score for about a minute until things readjust. But over-exposure to credit also hurts your ability to borrow. So if it were my decision, I'd lose two of those three cards (the ones I'm not using) and keep the old one with the long credit history. Use your credit card(s) as convenience cards -- in other words, make sure you pay them off in full every month -- and keep  your history nice and shiny.  

 

Dear Gail, I love your show and will get your book. I am a physician and therefore need to pay for my own retirement and disability plan. Clearly for my rrsp's more is better but for my disability insurance I don't know. My insurance company indexes my plan every year ,this means I now pay 8400$ post tax dollars a year. I am 45 that means I will pay another 200000$ before I retire, money that I will not get back!!! I have life insurance in amount of 300000$.
Should I refuse the yearly increase , decrease or cancel my disability insurance?

Thank you from a fan, Marie-France  

Marie-France, your disability premiums are high probably because the coverage you need is high. There's a direct correlation between how much insurance you're getting and how much you're paying in premiums. Reduce your coverage and you'll reduce your premiums. That being said, as an independent, self-employed individual, you must be careful to not under insure yourself. I would never cancel disability insurance, but a talk with a specialist may help you determine just how much you need.

 

We've recently found out that we're expecting in February. We have so much debt and a really poor handle on our finances. Are we better to save for the baby coming or try and pay down as much debt as possible. Which will have the better outcome?

Cherie  
      
Cherie, getting financially healthy is the best thing you can do for your baby. I'm not sure why people think of their money as separate and distinct pools -- savings on one hand, debt on the other -- because ultimately the money is the money and if you have $20,000 in savings and $20,000 in debt you have nothing. I suggest you figure out how to live on your partner's income and then use all your income to pay down your debt. When baby comes, you'll likely have less income, and having lived only on your partner's income you'll be ready for the drop off. And if the debt is gone, that will be a huge relief.

 

I have enough money in my account to pay off my credit card in full. The concern that I have is that I am self employed and that is part of my "nest". Should I bite the bullet and pay if off in full and if I fall short, find a part time job or continue making payments? The interest on the credit card is more than what I am making in my high interest e savings account which is not tax deductible due to the amount in the account. Thanks for your help!

Sam   
      
Sam, being without an emergency fund can be very disturbing and financially dangerous.
I think instead of using your safety net you should find another way of paying down the debt faster: more work with all the money  going to debt repayment; selling stuff you no longer need; whatever creative solution you can come up with. 
Keep your safety net in place, just in case. 

 

I am unemployed on EI benefits. (My benefits run out in January 2010) Currently I have $2,100 in a high-interest savings account which is at 1% right now, which I only just discovered. It's not making me much! I have $5,400 in credit card debt at 11.25% interest. Every month I pay $50 over the minimum plus whatever the charge is for the interest.

My question for you Gail is would be wise given my current situation to transfer that $2,100 to my debt or keep it as an emergency fund as I have been? If you were in this situation, what would you do?  

Lilly       

If it were me, Lilly, I would not give up my financial safety net to get the debt paid off faster. Having said that, at your rate of $50 a month on the principal, you'll take 9 years to pay off that credit card and spend almost $5000 in interest! OMG! Girl, you have got to get that monthly payment UP! To be debt free in three years or less, you need to be paying $150 a month toward the principal... above the interest you're paying.

 

I will be receiving a fairly large inheritance. I am in my 40's, I have a mortgage, some debt and I contribute consistently to RRSPS. Too often banks/financial planners may have their own personal agendas for your money. What specific issues do I need to consider? What suggestions do you recommend to best utilize the funds?   

Name Withheld      

I'm sorry for any loss you may have experienced that created this inheritance. To put the money to best use, you should:

1. Pay down your consumer debt
2. Establish an emergency fund
3. Catch up on any unused RRSP room you may have
4. Balance having some fun with putting some money toward your mortgage.

I don't know how much you'll be getting but if you've taken care of the first three points, then you should consider a little play and some sharing of experiences with family and friends, and then stick the remainder into paying down your mortgage. Does that sound like it might work for you?

 

I would like to know what portion of our income you recommend we direct towards building our emergency fund. We are married, in our early 40s, we have a mortgage, no consumer debt, we contribute over 10% to retirement savings and are working on building our emergency fund. Six months of essential expenses will be about $15,000. We are also wanting to save towards some substantial renovation/upkeep costs on our home. 3% of the value of our house would be about $500 a month. So far we have $3000 in our emergency fund but not much set aside for the house.  We have $650 a month available to put towards our emergency fund and the house fund. Should we  be putting the entire $650 into the emergency fund to get it up to $15000 as quickly as possible? Or is $100 a month enough? How quickly should we try to complete the emergency fund? Thank you so much! Love, love, love your show!  

Name Withheld
      
It is important that you establish the emergency fund as soon as you can since you never know when an emergency will strike... it won't necessarily wait for you. I know you want to do some renovations, but those should wait a bit. I would have at least half the emergency fund saved before you start splitting the money with the "reno" fund.

 

Hello Gail, I watch your show on a regular basis but I have a question that I am not sure what to do about. I am 31 years old and I will be relocating to Boston in a few months. I have been adding $30 a month to a retirement mutual fund since the age of 19 and currently I owe $6000 to Visa. My mutual funds have not accumulated a lot due to the current recession. My question is should I cash in my mutual funds in order to pay off my Visa before my big move?  

Michelle
      
While the idea of moving with a clean slate is no doubt appealing, you have to do the math to determine if the tax implications are acceptable when you withdraw money from your retirement plan. You should also think about how you have been spending, and why you accumulated that debt, so you can do things differently in your new place. If you have learned that debt accumulates slowly but steadily from overspending, and you're now watching your money more carefully, you'll do fine. If you're still not sure where that overspending came from and how you managed to accumulate $6,000 in consumer debt, you still have some learning to do. Good luck with the move.

 

I did a marathon watching of your show and then sat my hubby down to watch them over again with me.  We have a LOC mortgage, about half of it is fixed and the other is floating.  We seem to spend to the top of the floating portion constantly and never make progress on it.  Would it be better to make most of it fixed?  When you do a monthly dealership car loan is the amount of interest you pay back set or if you pay back earlier do you actually pay less in interest? Thank you for teaching money sense.  

Stephanie
      
Stephanie, if you're having trouble managing the variable part of your loan it may be wise to lock it all up and make regular payments. Of course, you then have to get on a budget since you've been using credit to fill gaps as you've gone, and with no credit available (on the house) you'll end up using a credit card or a line of credit if you don't get your spending in line.

As for the car loan question, paying the loan off sooner would save you interest if it is a loan. Not necessarily so on a lease.

 

Hi, How long till student loans show up on credit report?  I know you are probably very busy but I was hoping you could give me a couple pointers. Please point me in the right direction.

Name Withheld

If you are in Canada, your government student loans will never show up on your credit history since they are not reported.