August 2011 Questions & Answers

 

 


V Wrote: 
My husband and I owe roughly 250k on our home, with a 2.2% variable interest rate over 5 years (0.8% below prime). We also have a car which we're paying $825 a month with a 1.9% interest rate for 4 years. We put aside money for RRSPs and savings/emergency each month.

I think we should put extra money towards paying off the car faster, so we'll own it outright sooner. My husband thinks we should put extra money towards the house since the interest rate is higher. My reasoning is if we pay off the car sooner, we'll free up cash for the house AND we'll own the car. For example, if we put aside extra money each year for the car, at the end of 3 years we could own the car, but if we put that money towards the house, at the end of 3 years, we won't have paid off the house, and we'd still owe on the car. Which should we put extra money towards?

Gail Says: 
While the interest rate on the mortgage is higher, the house is an appreciating asset, while the car is a depreciating asset. You should pay the car off as fast as you can. Then you can use that money (the old car payment) to pay down the mortgage for a bigger payoff overall.

 

D Wrote: 
I am on a disability pension of $725.00 per month and have been on this for 14 years and will continue and I cannot increase my income. My wife works full time although she has health issues as well. My wife’s income or take home pay is about $2100.00 per month for a total monthly income of $2825.00.

Our current debts are Mortgage which was consolidated couple of times after the first consolidation of getting a mortgage on our once free and clear home. The amount of the mortgage is $54,435.00 at 3.8% for remaining 4 years on the current term and we pay it weekly with the taxes on that. There is a car loan at 0% and the balance owing is $32,746.20. This total debt = $87,181.20. Is this too much debt for our income? Can you please reply to me? I am stressed.

Gail Says: 
Relax, hon. Don't go getting all stressed out. Your car loan has no interest cost so you're just paying it off over time. The mortgage is very small, and manageable on your incomes. You don't say what your payments are, and this may be what's stressing you out. If your payments are gobbling up too much of your income, you'll feel squeezed. If that's the case, just extend the amortization on the mortgage for a couple more years to bring the payments down. Yes, you'll pay more interest in the long run, but you have to live somewhere. And having a little more cash flow and no stress will be well worth it in your situation.

 

B Wrote: 
I absolutely love your website, and watch your television shows almost religiously. By watching Till Debt Do you Part and Princess, I have avoided going out on many occasions this winter and have been able to put away almost $1200 in the past 3 months into an emergency savings account.

That said, I am a 24 year old, full time employee who has been in the working world for 3 years now, and have finally just paid off my student debts. Now, with the extra money that is no longer going into debt repayment, I am finding myself during this time of year considering if I should open an RRSP.

I know, you always encourage people to start saving for retirement as early as possible, however I still consider myself a young adult, and very unknowledgeable about this part of finances. Could you advise what the best option would be for me at this age to begin saving for retirement. I have researched online and gone back and forth about whether I should go the RRSP route or stick with a High Interest Savings Account until I get a little older!

Gail Says: 
There's a lot of confusing information out there, so it's no wonder really that you're a little confused. Every time I turn around some idiot is telling young people not to bother with an RRSP. I would strongly encourage you to consider using an RRSP. I don't know how much you're making so I don't know what your tax bracket is, but you don't have to claim the deduction when you make the contribution. You can actually hold the deduction for a year when your income is higher and you'll get back more tax. Why don't you go grab a copy of Never Too Late from the library and read through it. I think you'll find it extremely useful. Also, please make sure you continue to build up that emergency fund. You need to get it to six months' worth of your essential expenses. You can use a Tax Free Savings Account (TFSA) for that, and stick your long-term savings into the RRSP.

 

A Wrote: 
I moved away from my home for school, and have found that it was much harder than I thought it would be. I had thought I had saved up enough money to support myself until I went home for the summer (where I have a summer job) but, sadly, I have almost racked up almost $1000 on my credit card, and am going to have to get some assistance from my parents as well, in order to get through these next 2 months. I have no other student debt, just the credit card, but the money that my parents will be giving me is from my tuition savings. I have also transferred universities so I can live at home again, rent free.

After one month of working when I'm back in my hometown, I will have made enough money to pay off my credit card, but should I do that, and then begin saving for tuition and my future (I don't want to live at home forever!), or should I be saving and paying off debt consecutively?

Gail Says: 
At this stage you're not "saving" as I define it. You're accumulating money for your tuition, which is "planned spending". Get the debt paid off first, then focus on building up your tuition.

 

C Wrote: 
I have a question about critical illness insurance. In your book, "Debt Free Forever" (which I read like a bible, by the way!), you seem to present CI insurance more as an alternative to disability insurance, rather than as an insurance that is good for people to have anyway.....am I reading that wrong? I happen to be lucky enough to have a good disability insurance plan through work, but I also have a healthy dose of skepticism in terms of immediately qualifying for full disability, and the idea of that lump sum payment from CI insurance to help out in those times is very tempting.

My question is two fold - number one, if I have the good disability plan, would the CI premiums actually be a waste of money? And number two, the idea of paying the extra premium to get the benefit paid out after 25 years (regardless of whether I made a claim) is also very tempting, but a little harder on the budget - is it really worth more to have that extra benefit?

Gail Says: 
First, because you do not have individual DI (you're covered at work), CI can still make sense for the reasons you describe and because if you change jobs your DI wouldn't go with you.

Next, if you want to see if it's worth it, add up the cost of the insurance premium over the life of the policy, and call that B. Then add up the extra you have to pay for the return of premiums option and call that A. Now look at the numbers. Is it worth it to you to pay A to get B?

 

P Wrote: 
I'm in the process of finally moving out of my parents and getting a place of my own. I'm not sure what to do. I have a loan with a balance of just under $9000 that I pay bi-weekly, I have just over $5000 in savings and no other debt. I make about $40k/yr. I'm not sure if the best thing for me to do is use the $5000 to pay down my debt, use the $5000 towards furniture for my new place, or use the $5000 as some sort of down payment. My fear is using the $5000 unwisely and put myself into more debt that I've been trying to keep out of.

Gail Says: 
You need to have an emergency fund as a cushion. Aim to have 6 months worth of essential expense. In other words, keep that $5,000 as the beginning of that just-in-case fund so you don't have to run home if the caca hits the fan.

 

S Wrote: 
We're planning on purchasing a car. Is it better to finance through the dealership or arrange a loan through our bank? 

Gail Says: 
That all depends on where you get the better deal. Go to your dealership first and negotiate the cost of the car without asking about financing. Let them think you've got the financing all arranged. Sometimes dealerships are less willing to negotiate car price when they know they're going to have to eat a low financing rate. Once you've got what you think is your best deal on the car (and get it in writing), ask about the financing rates. Then go to your lender and ask about financing. Take the better deal.

 

C Wrote: 
My wife and I really enjoy your TV show and sensible suggestions for one to manage their money intelligently. I have a question. My wife and I sold our house, paid everything off and headed south to live in Puerto Vallarta Mexico. That was in Feb 2007. We returned to B.C. in May 2010 and my wife secured employment on Sept 15, 1010. Can we claim our return trip expenses (gas, accommodation and meals) as moving expenses to secure new employment on our 2010 tax return? We think not as we left Canada on our own accord. Any help would be appreciated. Thank you.

Gail Says: 
Typically moving expenses can only be claimed by people moving within Canada. There are some exceptions for full-time students and for "factual" or "deemed" residents of Canada, but I don't think you fall into either category.

A factual resident is someone who has kept significant residential ties in Canada while living or travelling outside the country. For more information, see Interpretation Bulletin IT-221, Determination of an Individual's Residence Status, or Pamphlet T4131, Canadian Residents Abroad.

A deemed resident is someone who at any time in the year lived outside Canada and did NOT keep residential ties to Canada, AND is a federal or provincial government employee posted abroad; a member of the Canadian Forces; a member of the Canadian Forces overseas school staff; or someone working under a Canadian International Development Agency program.

 

T Wrote: 
My husband and I are planning for retirement. We are still young (39 & 45) and want to make sure we are saving enough. We are in a lucky position that out mortgage is paid in full. Our investment "guy" has advised us to take out a $50,000 loan to max out our RRSP contribution. This scares us and I really want a 2nd opinion. Currently the only debt we have is approx $20,000 and we were looking forward to being debt free in about a year.

Gail Says: 
OMG, please don't. Very often a huge loan means you don't even get the best bang in terms of tax refund because you lower your tax bracket so much. You'd be far better off calculating the monthly payments on that loan and then using the equivalent amount to make monthly contributions to your RRSP to catch up. You'll save on interest and you won't run the risk of going offside on your taxes. BTW, with interest rates going up, that catch-up loan WILL cost you more every year since the rate is only pegged one year at a time. Please do it my way and save yourself all that interest.

 

A Wrote: 
I'm very excited due to the fact I'll be out of debt in the next couple of days. I am 25 years old and have been working with a great company for only 3 months and I'm making about $7-800 a week or more depending on overtime. I already have two savings accounts which have over $500 dollars each in them. I want to start a retirement fund and I was wondering how much you think I should start saving a month. I also want to finally move out on my own but I want to make sure I will be able to afford it. How much do you think I should have saved before I make the move on my own? 

Gail Says: 
In terms of saving for retirement, if you start now you can put away 6% of your income and you should be fine. So that would be $45 a week. Easy peasy, right? Now on to your plan to move out. You should have your first and last months' rent, your utility hook up fees and your costs for your first big grocery shop and whatever stuff you'll need to buy for your new diggs. And you should have six months' worth of essential expenses as an emergency fund. Then you'll be ready to launch out on your own.

 

J Wrote: 
I just saw you tonight at the South Costco. I have to say I was a bit taken back because I always said to my friend Michelle who I was with, 'If I could ever talk to Gail I would say this...' I say this a lot. Now tonight after seeing you I had a block because I wasn't prepared so I forgot all what I would ask you. I went back there about 10 minutes later to ask you a question and you were gone. So now I am emailing you with the question instead. As I mentioned, living in Calgary it is very expensive and I own my own condo. I have done all that you have said and I still can't make any changes unless I cut down on my social life. This really is not a lot but I am at my happiest when I am around people. I do have Crohns/Colitis so between naturopath and medication that is a big extra cost that I would love to go without so it adds up in a month. My work does pay for some but not a lot. What I am wanting to know since you said you would not come here to do a show...I have so many friends besides myself that have so many money issues and would really like help from someone like you. There really is no such thing besides a financial advisor but they usually just help you set up for savings. I am talking about day to day, month to month everyday stuff. I have a friend that is a financial analyst and he looked over my bills and what I have left over in a month and could not see where I could change anything unless I got another job. With being 32 years old I do not want to get another a job but feel this might be the only way. I do pay my credit card off each month however I never seem to have enough to put away for paying back my line of credit (which is basically maxed out) other than the interest each month. I just realized that I am still so happy I saw you tonight that I am rambling on about my life.

OK, long story short...can you recommend someone or a business that focuses on what you do? I realize this may not be cheap however I know a handful of people that would be really interested in this as they are in the same situation as me. As well, do you have courses on what you teach? Any chance you are coming to Costco again?

Gail Says:
I'm sorry you lost your words. That sometimes happens when people come upon me unexpectedly.
If you have more money going out than you have coming in the only solution is to cut back on what's going out or to bring more in. It's that simple m'dear. You have to get that debt paid off because then you can use the money you're putting to debt repayment to saving and fun. Until you've paid for what you've already racked up, you're always going to be struggling.

Figure out how much you need to put towards your debt to get it paid off within a reasonable time frame. This is also how long you're going to have to have that extra job. Then put every penny of your extra income toward the debt. Remember, you'll have a higher tax bill, so set some aside about 15% of your extra income (aside from what's being deducted) for taxes so that doesn't come as a shock to you.

 

R Wrote: 
Hi Gail, I am a 40 yr old widow with one child who just turned 18 & will be off to university in Sept 2011. The only debt I have is a Home Power line of credit with a balance of approximately $60K (I do use my credit card, but pay it off in full each month to get the travel rewards). I was paying $1K per month against my LOC to get it paid down so my home would be mortgage free, but then an appointment with my financial advisor showed me that I don't have enough to retire at 60 unless I start doing more with my retirement fund. I will have a small company pension ( not sure how much, but very little). I currently have $158K in my RRSP now. I have changed my debt repayment from $1K per month to $500 per month & am using the other $500 per month to pay into my retirement plan. I have my RRSP maxed & am now filling my TFSA. Is this the right way to do it, or should I change it back to pay off my mortgage first & then continue on with my retirement plan? I am also putting $500 per month into an RESP for my child for university & will continue to use this $500 per month to help her out with schooling costs.  (These funds are not coming from my working salary, but from my CPP I receive from my deceased husband.  I don’t miss this money because I have never used it for anything other than her education fund). I have approximately $45K saved for her education now. I make $49K per year salary. Am I doing the debt repayment right & the retirement saving at the same time, or should I concentrate on the debt repayment & deal with the retirement once the debt is paid?  Should I continue to contribute to my daughter’s RESP or tunnel that into my debt repayment at this stage of the game? I think I am doing it ok, but I'm not sure. I think my investment is earning around 7-8% annually.

Gail Says: 
You have a solid plan and you should stay on track with it. That $60K mortgage will be retired before you are, which is the point of the game, and in the mean time you'll be building up a good nest-egg for the future because you still have lots of time. As for your daughter, if you can keep helping her while you save for your own future as you're doing now, then that's great. I will help my children as much as I can because I want them starting their "real" lives with as little debt as possible.

 

T Wrote: 

HELP!!!  Recently, I did my taxes for 06-08.  Happily I found out that the government is going to be sending me a cheque for about $23 000.  Unhappily my spouse and I disagree on how it should be spent.  Currently the mortgage is around $170 000 and my spouse has around $25 000 in debt ($20 000/Line of Credit and $5000 /credit card).  All of that debt was before I came into the picture.  He says that all the $$ should be put right on that debt.  I don't want to do that, but the $$ still should go towards the family household (including updates on the house).  The house was purchased before I was around, but am told that this is partially my house, though my name has never been added to the mortgage.  I have no personal debt at all.  Please help.  I love your shows!

Gail Says

Wow, this is a nest of vipers, isn't it? Okay I don't know enough about your situation to really help -- I don't know how long you've been together, I don't know if you're legally married (which makes a difference for the house) but I can ask some questions that will guide you.

1. Why isn't your name on title of the home if it is partially your house? If you aren't married legally, you can't count on the house if you split up since it doesn't automatically become a 50/50 asset. Are you contributing to the housing costs fairly? You should be kicking in proportionate to your income.

2. What was the debt he's racked up for? If he's been playing hard and now want to use your tax refund to pay off his debt, how come you get to pay for his play?  He had a great time, so now it's time for him to pay for the pleasure he had.

3. Are you saving for retirement? You could use your tax refund to boost your retirement savings.

4. Do you have an emergency fund? You should have six months worth of essential expenses.

5. How do you handle your money as a couple? This is the perfect time to talk about how you want to share responsibility, what your goals are and what you plan to do if you ever have children together.

 

L Wrote: 

I love your show and record it everyday on my PVR!  I wanted to ask you a question. I was in a car accident over 2 years ago now and I am just at the point where the settlement is going to be finalized. I currently have $5000 of debt approximately - which will be paid off immediately with funds from this settlement.

What I receive over and above that amount which potentially will be substantial, I am wondering where you think I should turn with regards to investing...

Should I see an investment corporation?  Should I speak with my credit union? 

I am 23 years old and would love to ensure that I don't just 'blow' this cash. I want it to last, I want to invest into something that I will be able to use in the future...like a retirement savings plan.

To me it just seems like there are so many financial advisers out there and as bad as it sounds...they all seem a bit cheesy and I get the feeling that they are 'after' my money. I don't want to rush into investing but I also want to ensure I don't 'blow' my cash. I am trying to find a happy medium!  Suggestions?

Gail Says: 

You need to decide first what the point of the money is: Are you saving it for the future? Will you need it to provide an income? Will you want to use it to buy a home of your own?

At 23 with a very short work history you likely do not have a ton of RRSP contribution room. But you can use the TFSA, putting up to $5,000 a year in for the future.

As to what investments would suit you best, whatever you choose make sure you understand them. Don't buy anything you don't understand. That's a trap and you'll be disappointed.

You could work with an investment specialist, depending on how much money you have. I can't recommend anyone directly, but you should shop carefully and make sure this person is independent of any specific products so he or she can choose exactly what is right for you. In the mean time, start educating yourself. Buy a couple of good books and read up on investing. Look around the web and get familiar with what you need to know to be in charge of your own money.

 

M Wrote: 

I am a stay at home mom now, with no income of my own. Will I be able to contribute to my RRSPs (i.e. with my husbands money), or will my 'limit' be zero since it is based on 18% of earned income ? (Assuming I maxed out from the previous year).

Gail Says: 

RRSP contributions are based on the income earned in the previous year. So your 2011 contribution is based on 2010 income. Without an income of your own, you will not have any RRSP contribution room. However, your partner can contribute to a Spousal RRSP on your behalf, using his (or her) contribution room. So if your spouse has RRSP contribution room of $5,000, any amount of that $5,000 could be put into a Spousal plan. Your partner would get the deduction, and the money in the Spousal plan would belong to you and grow in your name.