October 2010 Questions & Answers



D wrote:
My husband has recently had a pay increase of approx. $1000/month net. Half of this is ongoing but half is only for about 6 months, as it is a temporary position.

I have absorbed the ongoing half of the payrise into our budget but am unsure what to do with the temporary amount.
We currently own our own house outright (no mortgage), pay more than double the mortgage on an investment property, have 7 months emergency money, to which we add approx. $750/month, have planned spending, no other debt, and are saving for retirement and kids’ future education.

So I guess what I am really wondering is this – am I required to save this extra $500/mth into our emergency fund or for some other requirement, or can I be frivolous with it? I am feeling a bit resentful about always having to stash away extra money, but am worried that if I use this money instead of ignoring it and putting it straight into savings, then I won’t be able to stop spending when the money stops coming in.

To me it seems like a matter of logic versus emotion. I am not sure which should win.

Gail Wrote:
If you've got all your i's dotted and your t's crossed -- which it sounds like you do -- you should use your windfall to have some fun. Is there some travelling you have been wanting to do? Or a day of shopping (of course you'll set a limit, but you'll also have lunch with friends, get a mani- or pedi- or just imagine some gorgeous hunk of a boy trailing after you with your packages!). I'm all for making sure there is balance in your life and once you've done the detail, you should indulge yourself a little.


Anne wrote:
I have just finished reading your book Debt - Free Forever, and it is fantastic.  I do have 2 questions.  

The first one is regarding putting things on credit and paying them off each month.  On page 286 Under Gail's Tips you mentioned that your credit score was lower because of practicing this method; However, on page 290 Under the Heading "Credit Cards aren't Evil" point number 7 states that using a credit card and paying it off each month is a great way to build credit.  I am a bit confused as to whether this is good practice or not.

The second question is about credit score.  I am aware that if potential lenders check out your score it can have an impact on your overall rating but am wondering if you look at your own score will it affect your rating?      

Gail Wrote:
Checking your own credit score doesn't impact anything. As for the conflict between the two points in my book, there's actually no conflict. The credit score is higher when you carry a balance because you are more profitable for the credit company... you're paying interest and they're making money off you. That's great for them, and dumb for you. So you should NOT do this. However, using a credit card regularly means your credit use is being reported to the bureau and you're building a history. That IS good for you. I really hate the credit scoring system. Something that was created for one purpose (to tell lenders who the biggest suckers were) has been turned to another purpose (to penalize people who are good money managers.) If you're chasing a credit score, you're a sucker!


P wrote:
Gail! I just finished your new book. Very interesting....but...(and that's a big'a'butt) what to do when you have reached 55 and have lived your life wiff'in those bounderies of 'YOUR MEANS' and still have no savings, no retirement back up plan, and nothing really to show for it. I have worked hard all my life and given up all the dreams.....[a farm....a horse...to be an artist...pay for my childrens education....and so forth] so that I could be debt free and not OWE THE MAN so what now?   

Gail Wrote:
Living within your means also means setting aside some of what you make for the future. I don't promote people giving up their dreams. I believe dreams are important and that living life in balance is the key to happiness. However, if you couldn't stay out of debt and save for the future, it may be that you didn't make enough money. If you're at that point in your life where you're asking, "What now?" it may be time to go through the exercise of deciding what you really, really want. If it is to stop work completely, no doubt you can live a chopped-back life and survive on your government pension. If you want more, then you'll have to decide how you go about doing that. Lots of people make the decision to keep working long past the normal retirement age so they can not only save more money, but do things that keep them interested and engaged in life. But those are things you'll have to decide for yourself. I send you best wishes for the next part of your journey. You can decide where you want to go. I hope you make some good choices. 


Lyndsey wrote:
My husband and I were just married in August 2009, however we have been living together in Northern Manitoba (Leaf Rapids) since August 2008. We are 28 years of age. We came to the North because my husband is American and was waiting for his Permanent Resident status-he was not able to work legally for a year until he got his paperwork and it was the only way I could support both of us and make our loan payments. Furthermore, there isn't too many places to spend money on entertainment and eating out when you live in the North.

My husband and I have a combined debt of about $85 000. About $70 000 of that is from my student loans. I am a teacher and earn about $43,000/year (after deductions) while my husband earns about $35 000 a year (after deductions) working in construction. This is our dilemma, due to the remote area we live in, there aren't any jobs and my husband is away for 40 days at a time with 6 days off in between. He works 7 days a week, 12 hours a day during this time. Our time apart is wearing on us and neither of us are happy with the situation. We are finding ourselves pondering with that question: Money vs. happiness?? Should my husband quit his job so we can be together until we find something somewhere else once the school year is finished?

Since September, I have been putting aside $100/month for Emergency. We have also been putting away $400/month in a TFSA. We finally have our credit card to $300 (it was $5000 in September) and this month (January) we will make extra payments on our debt using your "Own Up to Your Debt" worksheet.

We live in an apartment and pay $513/month. We want a house, but know the North is not where we want to settle down. We want to be in an area where I can find a job as a teacher and he can find work as well. How do you suggest we prepare for a house/mortgage?  Also, can you offer us any other piece of advice to help ease our situation?

Gail Wrote:
You're doing very well and have made some hard decisions to deal with your debt. Congrats on setting up the emergency fund and the TFSA, and the major progress you've made on your credit card. Your student debt is enormous, and I'm a little surprised since you are a teacher and that degree doesn't usually come with so big a debt. 

It sounds like your husband is working now, although his pace is gruelling, and so you should be able to make major inroads on your debt over the next little while. With a net income of about 78,000, and very low expenses, you could have a huge chunk of that debt gone in about a year.

I know the separation is hard... it feels like hell... but you're young and have heaps of time together. Besides, if he's really working that hard, probably all he has time for right now is dinner and bed. But you have made good decisions to create a firm foundation for your future together, and this isn't the toughest crap you'll face, so some practice will be good for you both. 

Put buying a house now out of your mind completely. Until you have that debt under control, taking on more would be foolish. Once you have that debt paid right down, you can start thinking about buying a house, and I have a number of suggestions on my blog for the best ways to prep. Go read them. 

If you can be debt free and ready to buy a house in three years, you'll be in great shape to create a future together that is sound and full of options. And think of the stories you'll be able to tell your kids.


Janet wrote:
I have just finished reading Debt-Free Forever.  I want to thank you for giving me the steps required to figure out what I need to do to eliminate our family's debt.  My question is:  We have refinanced our mortgage a couple of times to repay a line of credit and credit cards (after reading your book and watching your show I now know how stupid we have been).  Trying to calculate our debt - how do I figure out what portion of the overall mortgage remaining is the amount of debt from our previous debts versus the actual amount of our original mortgage amount?   

Gail Wrote:
You should know what your first mortgage amount was... that's usually etched in every home-owner's mind. Simply deduct that from the current mortgage amount and the difference is the refinancing you've done. If you've done this a couple of times it me be quite a daunting number. Don't panic. You want to be conscious of working toward debt freedom, not scared silly. 


Jocelyn wrote:
I love your show and try to follow all of the advice that you provide.  My question is how do I divide my income once I have paid all of my debt?  Do you have a suggestion as to where the fifteen percent that was going to debt repayment should be placed?   My income is not terribly high, $2500 per month, but my rent is only $905 inclusive and my other fixed expenses come to $250 per month.  I have two children, 11 and 5, I do not have a vehicle nor am I looking to purchase one in the near future.  I am working on building my emergency fund and savings, so far I have two months expenses covered, and I have no debt of any kind.  What should my next steps be?   

Gail Wrote:
If you're working on building up your emergency fund and you're saving something for the future for both your own retirement and your children's future education, then I think you should reincorporate some of that debt repayment money back into your budget and have some fun with your kids!


Jennifer wrote:
My husband currently brings home about $3100 a month, and I do not earn anything as I am home with our son.  I’d like to stay at home as long as the budget allows. We have a mortgage of $1225 per month and this is our only debt. We have just over $10,000 in TFSAs (which we consider an emergency fund) and about $5000 split between chequing and savings accounts.  Our monthly budget includes about $200 to go to retirement savings.  My husband also contributes to a company pension plan at a rate of 4% of his gross pay (they match the contribution).  

My question is about where our monthly savings should go.  First off, can we start to spend some money on fun stuff yet?  We’ve been quite diligent about budgeting and saving until we got the student loan paid off, and would love to be able to have a bit more to spend on fun.  Also, should we save what money we have in RRSPs or TFSAs?  Or some other option?  

Gail Wrote:
Maximizing your TFSA makes sense, but so does contributing to an RRSP (for both the tax savings and the tax-deferred compound growth). And if your husband contributes to a spousal RRSP on your behalf, that would give you a source of income when you finally do retire, splitting your retirement income so you can save on taxes. So, maximize the RRSP as much as he is allowed, contributing in your name, and then if there's still more money to save, stick it in a TFSA or two. You haven't mentioned if you've started educational savings for your son. This, too, should be a priority at least to the point where you're getting all the CESG, the grant money, that's available to you. 


Christine wrote:
I am a single mom (32 years old) of a three year old. My husband left, after 9 years together, when our son was three weeks old. My total world fell apart. He ruined my life that I worked so hard for and ruined my credit. I lost a lot of money in the divorce. I have been struggling quite a bit ever since and I fear that I am going to lose everything :( I keep trying to get my head back above water but it seems impossible.

I make $1860 clear every two weeks and downgraded to a townhome. To recoup some of the penalties we had from breaking a 7-year cash-back mortgage, I ported it to my new house. My payments are currently $955 incl property tax on a biweekly basis (7.15% rate).  I have a car loan which costs me $374/month and then $15k in visa, loan and credit line debt (maxed out) on top of all the insurances, daycare and house bill payments. I am really, really strapped and trying so hard to become healthy financially.

I don't want to lose my home. I want to not run out of money and I want to save for my son's education and for an emergency fund. I called the bank to see if I could renew my mortgage now and get a lower interest rate, knowing that I would have a penalty. Because I have two years left on my present term, they said it would cost $13k to break and renew now. I don’t know what to do. Help!

Gail says:
Paying a penalty on an early renewal to get a lower interest rate can be a bitter pill to swallow. I recommend that you go with a blend-and-extend mortgage. With a blend-and- extend, you continue to pay the existing interest rate for the remaining term on your mortgage, but you renew early to lock in the lower rate for the remaining term. Let’s say you have 18 months to go on your mortgage at 5%. For argument’s sake, the current 5-year rate is sitting at 4%. If you used a blend-and-extend, you’d pay 5% for the first 18 months and 4% for the remaining 3.5 years on your new 5-year term.

While you’re at it, if you have any equity in the home see if your lender will let you can take it out to consolidate your existing $15,000 in consumer debt at a lower rate.

Don’t be surprised if your bank asks you to close all your other credit including your credit cards and your line. Having consolidated to the mortgage, you should be working to live within your means and not racking up any more debt.


T wrote:
My husband's parents have always lived for today, never saved one penny, do not own a home and have often worked "underground" to avoid paying taxes, EI or CPP. As a result, when my father-in-law was stricken with dementia at age 67, they were destitute. My father-in-law will be moving into a senior's home sometime in the next few months. When that happens, his income will be used to pay for his care and my mother-in-law will have a small income made up of Old Age Security, the Guaranteed Income Supplement, a tiny amount of CPP and an even tinier pension from a private source. She will have enough money to live a modest life if she lives in a seniors building that charges rent based on the individual’s income. Unfortunately, she doesn't wish to do this and is insisting that we purchase a home for her to live in.

We are getting phone calls from relatives and friends suggesting that we are unreasonable for not agreeing to her wishes because we "can afford to purchase her a home". Gail, although we are a single income family, we do have a good income and are currently mortgage and debt free. While we are currently debt free, we continue to save the equivalent of a mortgage payment each month because we anticipating a transfer as soon as 2011 to an extremely expensive housing market. We will have two children in university/college and, because we are in our late 40's, are saving as much as possible for our own retirement.

My question is about our responsibilities. Are we more responsible for our parents or our children and our own retirement? Should we buy our mother-in-law a home to live in or sacrifice our ability to help our children obtain an education and our own retirement? We can't do both.

Gail says:
It’s tough when familial responsibilities make you feel like you’re between a rock and a hard place. More and more of The Baby Boomers are going to be in this position as their parents move into retirement and their children are heading off to university. Take heart.

As for your responsibility, here’s my take on it. Your in-laws made decisions in their lives that suited them at the time, but had some long-term negative consequences. They’ll have to live with that. If your MIL wanted a house of her own, she should have been working to achieve that goal before she retired. It does not become your responsibility to make her dreams a reality. Your responsibility is to look after your own futures (so you don’t do this to your kids), and to help your children as much as you can. If your MIL would be destitute, I’d say you have to find a way to help. But that’s not the case.

Never mind the pressure from other family members. If they feel strongly she should be in a home of her own, they can put their money where their mouths are. Otherwise, they should shut up.


S 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.


C 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.

J wrote:
We are soon moving to our third home (last one for a long time). We have the 20% down-payment 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 -ear 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.