November 2010 Questions & Answers



Alouette wrote:
My financial problem is the opposite of your guests. I am generous, give over 10% to charity annually, lend and give money (sometimes lots) to friends and family, and can't spend on myself. My clothes are homemade or used, I always shop for bargains, make anything I can at home (bread, hummus, wallpaper paste - my latest, found wallpaper at $2.00 a roll at Habitat for Humanity store and did my bathroom, looks lovely) and feel guilty when I do splurge, and my splurges are small, a coffee and pastry out, a mango instead of an apple, etc. I realise this is disproportionate and would love some advice on how to be more balanced.

Gail says:
If you are happy doing what you're doing, then I don't see a problem. If you are not happy, what are you not happy about? Do you want to give away less and spend more on yourself? Ask yourself why you have the imbalance you feel you have right now? Is it that others are telling you to spend more on yourself? Does it matter what they think? Are you putting yourself at risk financially? If that's the case, you need to make a plan for how much you give/lend/share each year and stick to the plan. You might decide, for example, to share 20% of your income. You decide how much that is, put it into your budget every month, pick your "causes" and share. When that money is gone, you stop. It's just like the money you budget for food or fun. As for not spending enough on yourself, figure out what you'd like to do and take the same approach, putting specific amounts into your budget for those things. You might decide, for example, to see a movie once a month, and have dinner with friends every second week. You'd figure out how much you want to spend on these outings, and put the money into your budget. As long as your budget balances and you're happy, I think you're doing fine. Simplicity is a blessing and you have it in spades. 


S wrote: 
My husband and I are frustrated and frightened and don't know where to turn.  His parents are thinking of retirement.  His mom's been a stay-at-home mom, and his dad a contract worker.  They have no pension, and have only recently (last 10 years) started an RRSP.  They are in their early 60s, and won't be able to access Canada pension.  The thing is, we aren't confident they have enough money to retire on, nor are we convinced they've done the math.  Can you please help by suggesting what kinds of questions/directions we can do to help?  THANK YOU!   

Gail says: 
I don't want you to think this is trite, but the first question you have to ask your inlaws is the most obvious one:  What will you be living on when you retire.  Technically your MIL isn't retiring since she hasn't worked outside the home. If your FIL has paid into CPP he can take it as early as age 60.  Old Age Security can't start until 65.  So the question, "What will you live on?" makes perfect sense as a starting point. 


R wrote: 
How do I get over the anxiety I feel from not shopping. I am paying off $8400 in cc debt and saving. I have always had excellent credit and savings but now that I am on a budget I am feeling deprived of wants and don't know how to feel positive. The sadder I feel the more I want to shop. My bf is the same.  I swim, walk the dog and do all kinds of free things. I don't have money for a counsellor. You inspire me Gail to do my best but I have this empty whole feeling.   

Gail says: 
I am so sorry you are having such a difficult time with this.  It is sad to be doing the right thing but feeling worse as a result.  Don’t you just hate the way our minds work sometimes?   It’s not unusual to miss the rush you used to get from shopping.  Like a drug addict who goes cold turkey, there’s a strong sense of loss, a yearning, and that can make you very unhappy.  But know that every day that you stay “clean” you’re getting closer and closer to being finding the right balance and coming back into harmony.  I think you need to analyze how shopping affects you to get a handle on what you can do about it.

- Will shopping anywhere (the dollar store, the grocery store) give you a sense of happiness?
- Is the spaces between you’re shopping the problem? If you grocery shop once a week, would shopping twice a week fend off the miseries?
- Do impulse purchases give you more of a thrill than planned purchases?
- Do you experience buyer’s regret when you do spend money?
- Can you calm your addition by planning to shop or do you actually have to buy something to feel better?
- What else have you done that has given you the same thrill as shopping?

Replacing shopping with walking the dog will eat up time, but it won’t give you a psychological kick, and that’s what you’re missing.  You need something that you can sub into the shopping spot that gives you the same kind of thrill as the shopping did.  It can’t be something equally destructive.  So no gambling.

You also don’t have to stop shopping completely.  I’m a big believer in balance.  So NO SHOPPING EVER isn’t my motto.  As long as you’re shopping consciously, not doing yourself financial harm, and keeping everything else (debt-repayment, saving,) in balance, there’s nothing wrong with buying the things you need and some of the things you want.


C wrote: 
I made an investment of $10,000 into a family business.  Four years later, this business has blossomed and is now being sold.  My share of the profit will be $200,000. I am 33 years old and want to reinvest so that I can turn this into much more.  I really don't want to lock it away for more than 10 years as I am living in a less than ideal home and cannot wait to buy a new one.  I have been researching different investment opportunities but am overwhelmed with the different options.  One company I came across has very, very high interest on their fixed return program.  I am attracted to the opportunity an investment like this could have but am not seasoned enough to know if it is a viable option.

Gail says: 

Carmen, whenever investments pop up promising returns that are significantly higher than the current average rates of return you have to be VERY careful.  Extremely high returns -- or promises of return -- are used to lure novice investors and greedy people into plunging good money into suspect investments. Have you checked with local authorities as to whether this company is viable?  Have you looked at the kinds of investments they are making?  Read their financial statements?  If you're not prepared to do the legwork, don't be surprised if you get taken. 


Erin wrote:
I owe approximately $10,000 and I am putting $1000 down on the debt each month.   I've consolidated half of it onto an already created consolidate loan and am paying 5% on that, as well as a balance transfer for the other $5000 at a .97% interest rate.   So overall, I'm doing good.   I'm living off the jars, and I should be debt free by next July (which is when my wedding is woohoo).  Anyways... I hear you say for people to put their savings into an account at 5% and they'll have x-amount when they retire.   My question is two part - 1) where are these 5% bank savings accounts, because I can’t seem to find any that have that high of interest rates.   And 2) When my debt is paid off, how do you figure out how much to put towards savings each month to maximize the amount when I retire.  (I'm 27 right now by the way and make approx $47000/yr gross)  Thanks! and you are AWESOME!  Erin :)  

Gail says: 
Erin, you're right, there is no saving account paying 5% right now.  But I remember when you could get 10% on a savings or term deposit... I know, before your time. Anyhooo...  the 5% I refer to is the average return over the long-term when you invest your money...  and that's doable using a variety of different types of investments like stocks, bonds and so on.  You can start now to learn about investing so that when you do have enough available to invest you can make sound choices.

As for how to maximize your savings once your debt is gone, try to put away the maximum you can in an RRSP.  But don't do that and sacrifice your LIFE completely.  I often suggest that once the debt is paid off,  people take half that money and use it to boost emergency and long term savings and use the other half to have a great life.  NO MORE DEBT!  I hope you've started saving for that wedding!


K wrote: 
I have 3 credit cards that don't have anything owing on them.  I have chosen my two to keep.  One MasterCard at 5.99% and a Visa Line of Credit at 5.25%.  The other 3 (that I don't owe anything on) are 19% and 18.9%. I've asked a number of financial persons if I should call and cancel the three cards or just cut them up and not use them.  I've gotten a pile of different answers on this one.  If I leave them open does it hurt my credit rating and if I close them does it hurt my credit rating.  What is your advice on this?  Cancel or Keep and not use?

Gail says: 
Cancelling will cause a short term blip on your credit score, but so too will having lots of access to credit. Bite the bullet and cancel.  Keep the rest in tip top shape and you'll be back to even in a few months.


G wrote:
Both my husband and I are working fulltime and get benefits.  We managed to get a consolidation personal loan @ 8.75% for our high interest debt ie cc.  We are now on an extremely tight budget and are putting $2100 towards debt repayment. The consolidation loan is interest-only though we are paying approx $ 900 extra every month. I know debt fatigue is going to be a major issue.  Any thoughts on avoiding debt fatigue?  How can we accelerate the pace of the loan repayment so we can finish in 3-31/2 years?

Gail says:
Take the loan amount and divide it by the $900 you are putting towards the principle each month.  That'll tell you how many months it'll be (approximately, because your balance will decline) until the loan is paid off.  If you want it paid off faster, you’ll have to up your payments. As for the debt fatigue, you will have to work hard to keep yourself focused on what you are accomplishing.  I suggest you create a chart (Like the large thermometer charts used by some charities) and each month as you pay off principal, colour your thermometer to show your progress.  Anything that shows that you are getting closer to your goal will help you to stay focused.  And make sure you build in small rewards for reaching particular milestones.  You don't have to spend a lot of money, but a little treat for working hard and hitting a goal is a very good idea.  You not only get to look forward to being debt free, but you get to look forward to each of those small indulgences you've earned through your focus and your hard work.


C wrote: 
I am just finishing my PhD and starting to work in the "real" world. I have zero student loans and $20,000 saved for a down payment on a house/condo.  I am getting a lot of mixed messages on how much I should spent and what type of mortgage I should get.  I have been told bi-weekly over a monthly mortgage doesn't really save you any money, however, every time I run the numbers I save money because I am paying the mortgage down faster.  Also they are telling me that I should only put 5 or 10% down on a property and just pay the CMHC premium (or roll the CMHC premium into the mortgage) and then invest the rest of my savings.  But is that really the smartest decision? Lastly, variable vs. fixed...I am going to move in about 2 years so I am wanting a mortgage that I won't have huge penalties if I sell in 2 years. I do have money to cover the costs of closing, etc aside from my down payment.  I'm a little confused on exactly how to make the smartest decision when investing in real estate as a first time buyer.

Gail says: 
Congrats on graduating from school in great shape.  You're clearly a very sensible girl, and you should be extremely proud of what you've achieved.  If you are planning to move in two years, buying makes no sense at all. The costs of getting into and out of real estate are quite significant, and if you're planning on moving that quickly you shouldn't be buying.  Your home would have to appreciate by over 6% just to cover the real estate commission to sell your home, unless you planned a private sale. 

As for the question of bi-weekly over monthly, the savings is small, but using an accelerated bi-weekly will get you to mortgage free much faster since you actually end up making a whole extra payment against your mortgage every year.

Now to the downpayment.  Who's telling you this nonsense?  You should most certainly put as much down as you can.  You're perfectly right to think that doing it that way, reducing your carrying costs, and investing the difference makes the most sense.  Some people believe that because you "hide" the CMHC fees in the mortgage, that you didn't pay more than you had to.  Hmmm.  Delusional. 

Now to the question of fixed versus variable. Whenever you take a variable rate, you have to keep your eye on the market so the rate doesn't get away from you. Interestingly enough, rates used to change primarily when the prime rate changed.  But rates change more often than that these days, so keep a close eye if you do decide to go with a variable rate.


J wrote: 
Thank you for inspiring us to face reality and pay off our consumer debt before it accumulates to unmanageable proportions. What are your thoughts on being obliged to spend money that simply isn't currently available for a special family occasion?  My mother is reaching a milestone birthday... her 80th... and wishes her family to join her & her husband at a restaurant to celebrate... separate tabs all round.  With our current cash only budget, we simply can't afford the cost.  Do we pay with credit, and suffer that guilt, or not attend, and suffer that guilt?  

Gail says: 
How about no guilt at all.  You and your partner can eat at home before you go.  Then, at the restaurant, order something small like an appetizer and dessert.  Stick with water.  Have a cuppa coffee or tea.  You're not actually there for the food, you're there for the company.  If anyone asks, you're not all that hungry.  (How could you be after that whopping lunch you had?)


Jennifer wrote: 
I have a question about emergency funds. Both my husband and I have been at our jobs a long time and that leads me to believe that if we lost our jobs, our severance would be the same thing as an emergency fund.  And we would get employment insurance too. So do we really need an emergency fund?

Gail says: 

Really, your severance would be worth the equivalent of six months’ worth of expenses? What if your company became insolvent?  Or if one of you became sick and the other had to take on the full responsibility for all the bills to be paid?  Or you saw your hours cut at work? It is a sad reality that people who have stable jobs in good companies find themselves kicked to the curb with far less than they imagined they would have. And it can take some people a long, long time to find another job. Sometimes you’ll find yourself making less.  There are so many different ways for an "emergency" to strike.  Having money in the bank gives you options.  And the peace of mind is worth so much more than just the money in the bank. This is one of the things most people who don’t have an emergency fund can’t appreciate. But if you’re without one, it’s only  a matter of time before you’ll be wishing you had one. No one is ever lucky enough to get all the way through life without some crap hitting their fan. Plan now and you can reduce the mess.


Joanne wrote: 
I have implemented many of the strategies that you suggest and was able to pay for a family vacation and home renos with cash and still pay down our debt by 10,000 in one year, which I am extremely proud of. My husband, on the other hand, feels all the money we make should go towards our credit line and use that as a revolving account all in the name of not losing money every month.  I have an idea of what he's trying to say but I'm concerned with his thinking. For example, if we decide to go on a vacation we should decide how much we are going to spend, put it on our credit line, leave it there and then pull it out. I believe we should put it in a bank account and forget it.  Which is the better way of thinking?

Gail says: 
Your husband is technically correct.  For every day you've made a payment against your line, you've reduced your interest costs.  However, and it's a big however, if you have consumer debt, you should not be thinking of spending money to play.  You should pay off that debt first, and then accumulate your holiday money.  I know this means deferring your holiday, but if you keep scratching your Wants itch, you're going to be in debt longer and paying more in interest.  So if you're really committed to cutting your interest costs, get that sucker paid off before you spend any more money on stuff that isn't a Need.


S wrote: 
I love your blog and hope you can help settle a difference of opinion my husband and I are having. We have no debts, good credit, two incomes, no dependents and are about to buy our first home ($240K). We have $50K to put down and have secured a five year fixed rate of 3.69%.

Recently, my husband came into a very generous inheritance of $200K and now we have a choice: 1. live mortgage free and re-build our savings by setting aside big chunks of our income (probably even set aside one entire income into savings every month) or 2. take advantage of the low interest rates, carry a mortgage for five years and put the remainder of the inheritance into investments right away.

On the one hand, paying off the house right away feels like putting all our eggs in a single basket and with interest rates so low, we could potentially make more than 4% through mutual funds. But on the other hand, it would be a huge relief to remain debt free. So what do you think - what's the best way to put our money to work?

Gail says: 
If you really think you can have your mortgage paid off in five years, then you could invest the money and hope your return exceeds the cost on the mortgage.  If you have no retirement assets built up, this would be a good way of catching up.  However, if you are being overly optimistic about being mortgage free in five years, and you are at all concerned about how much interest rates will go up between now and then, you might want to put the money into the mortgage.

Here are a few things to keep in mind:

You are paying the interest on the mortgage with after-tax dollars, so your investments would have to do considerably better than 4% for you to break even.   And while predictions for where the market is going are good right now, they are only predictions.  But since you likely have a long, long investment horizon, I wouldn't worry too much, since in all likelihood the market will do very well over the long, long term.

If you're dumping a lot of money into the market all at once, you had better have a great advisor who knows what he or she is doing or you could end up buying a lot of stuff "high".   If you're inexperienced as investors, what steps are you going to take to educate yourselves and manage your money?   If you aren't really ready to take on a $200,000 investment portfolio, doing the "sure thing" and paying off debt makes more sense.   Then you can take some time to learn, and you can use that extra paycheque to dollar cost average into the markets.

Do you know anything about index investing?  You should before you decide to buy mutual funds.


Charlene  wrote:
I'm debating whether or not to get a new car.  I'm struggle with entitlement (I'm almost done my MSc (although it's not done yet - hence I kinda feel like a don't deserve it yet) and I just landed my dream job) and need (I have a perfectly good older car that I could drive until it dies and it's got more than a few years left)?  They've got great deals right now (0% interest - so the bank doesn't get any of my money) and we can afford it.  I've worked the numbers out and we can afford it while saving 45% of our income (RRSPs, House fund, trip fund, and other summer events).  So Gail, what should a girl do that has her finances in order? Buy the car or not buy the car?

Gail says:
If you're going to suffer guilt for buying the car, don't buy the car. If you're going to experience joy from buying the car, buy the car. If you've got a touch of both, which one feels stronger? You sound like you're doing very well, and using money to bring pleasure is part of why we work hard. As long as you've got all your bases covered (emergency fund, long-term savings), you've got not debt and you're not using credit to go shopping, I say you should spend your money any way you like. 


Isabel wrote:
Please know that I appreciate your time, and I've searched your site and blog for the answer to my question before writing this. How far back do you suggest keeping investment statements? You wrote that people should keep the statements and ditch the marketing pieces, but *how long* should those statements be kept?  Reading something like Time for a Quick Clean-up is reassuring: I don't have to keep all that paper and consider buying a whole new filing cabinet for it? Yay! Anyway, best of luck, and I hope my question is worthwhile!

Gail says:
You should keep those suckers honey, so you'll have a reference point when you sell the investments. Anything that has tax implications needs to be kept for a minimum of seven years from when you referred to it on your taxes. You don't have to hold on to investment statements themselves for much past a year, but broker confirmation slips are keepers for up to seven years past the date you sell. If your investment house sends you an annual trading summary, you can use this instead of keeping all the individual slips. If you're looking for a way to eliminate the paper, consider going with electronic statements and scanning any paperwork you want to keep. Voilá! Neat as a pin. 


S wrote:
Gail, I'm in a real pickle over here! My boyfriend and I both own houses and are going to be moving in together into my house in May.  He is thinking about renting his house to his brother.  The complicated part is that his brother is in school and will be for at least 5 more years, so it would actually be his mother and father who would be paying the rent.

His parents are not thrilled about his brother moving out and now my boyfriend is caught between his parents and brother.  He doesn't feel he can rent or sell to anyone else due to the resentment it would cause in his family.  Further complicating things, his parents helped him renovate his house at no cost.

Gail, if his parents can afford to pay his mortgage/bills as rent for his brother, would it make more sense for them to just buy the house?  That would eliminate my boyfriend as the awkward middleman, and he would have the profit, whereas if we rent to his brother it will be at cost, not as a profit.

I'm stuck in the middle of financial/family drama and can't see how to get out!!  Your advice would be greatly appreciated so I can make an educated argument to my boyfriend.

Thanks so much, I really appreciate your show and your practical attitude to finance!  Sara  
Gail says:
Wow, this is a biggie when measured in cow-patties! If your boyfriend's parents aren't thrilled with their son moving into the house, then why are they offering to pay his bills? That makes no sense. And if they get into a fight with him because he's not doing what they expect, will they stop paying those bills? Or will they be caught between their two sons. I'd avoid this situation like the plague.

I suggest you and your partner sell his house to a disinterested third party. He can then give you half the money (for his share of your house) which you can use for investment purposes. He can keep his half of the money and do whatever he'd like with it. If there are mortgages on both houses, then using the profit from the sale of his house to pay down your newly joint home makes perfect sense.