February 2011 Questions & Answers

 

 


Judy wrote: 
Hello Gail, I have sought your advice before and now I am hoping you won't mind my asking your advice once again.

My brother has a van lease that has just come due and he will be returning the van.  Now he is attempting to buy a small car and because he has such a bad credit rating (credit card payments overdue, etc.) the banks will only offer him a loan at 14.5% (ouch) instead of the going rate of 2.75%.  They have said this is his way of improving his credit rating.

He has asked my opinion on this. I believe he may need to swallow his pride and accept the offer but we are wondering if he should hold out and look around somewhere else for a lower interest rate or if he should accept the offer.

I have been working with your book, "Debt Free Forever" and have recently bought it for him.  I have been trying to help him get back on track  financially and he could afford the payments at 14.5% in his budget.  We  just wonder if that is higher than he could get somewhere else.

I would really appreciate your opinion on this matter because I don't want  to steer him down the wrong path.
Forever thankful, Judy.


Gail says: 
It may be, and he'll have to ask around to see... do his research.  But if he has a crappy credit rating, he may very well have to suck up the higher interest rate.  The good news is that car loans aren't "locked in"... you should be able to pay them off at any time.  So after a year or so of keeping his nose clean, he could go shopping for a cheaper loan and pay off the old one to get a lower rate.

 

K wrote: 
Ten years ago I had $50 000 in student debt, and after my husband and I got married we sucked it up, lived pretty lean, and paid off that plus $10 000 left on his mortgage in just over a year.  So, as you can see we are able to pay off debt when we put our minds to it!

After that we started having babies (three of them), reduced our income (mat leaves only partly topped up, extended parental leave and reduced work hours to spend more time with the kids) and we also moved to a bigger house.  We have a good income, live within our means (no fancy clothes or cars!), and our only debt is our $130 000 mortgage.  We have a quite low floating interest rate of prime minus 0.9% on our mortgage.  We are making quite low mortgage payments right now (minimum on 45-year mortgage), because our income is reduced while we work reduced hours to spend more time with the kids, and we have also prioritized RRSPs and RESPs.  You generally seem to advise people to pay down their mortgages as quickly as possible, but given the low interest rate on our mortgage are we doing the right thing by putting more towards savings right now?

We love your show and how you tell it like it is, and even though we don't have out-of-control debt we have learned lots from watching it. Thanks!


Gail says: 
You are doing the right thing for YOU.  You've worked hard to put yourself in a position to spend time caring for your children, you're living within your means and you're saving a little sumthin' sumthin'.  You are both doing fabulously.  Chill on the mortgage.  Have a great life.  And make sure you incorporate all your smarts about money into your kids' lives so they can learn from you. 

 

L wrote: 
My husband and I have no debt other than our mortgage and really want to pay it off ASAP. We are hoping to pay the remaining $232000 within 4 years.  Currently our biweekly payments are $820 at 3.8% interest for 5 years (we have just under 5 years remaining on our term).  We make about $110000 combined/year and have no kids or pets.  We have $30000 dollars saved we are willing to use as a kick start towards paying down the mortgage.  Is this possible?  If so, how do we do it?  If not, what is a more reasonable goal? Thanks in advance


Gail says: 
So you think you're going to be able to come up with $5,000 a month to pay off your mortgage in four years.  Wow!  That's pretty terrific.  I would not, however, tap the money you currently have in savings if that is your emergency fund.  You should keep at least six months worth of money to cover essential expenses so that you aren't forced to use credit if the caca hits the fan. 

 

Mark wrote: 
Hi Gail, I just love your show.  It gives me so much affirmation to continue on the right path to financial freedom.
My question is about my marriage.  I have been married to a Russian woman now for almost five years. In those five years, I have paid all the bills.  Two mortgages;  which I own without her, utilities, property taxes.... She contributes 1/3 of the utilities.  She needed a lot of help in the beginning when she immigrated to Canada in May, 2006. She couldn't work for a couple of years and I supported her without question.

Now, I am unemployed and she is working and I am feeling the pressure of having to pay all the bills.
I have a plan to make ends meet.  I have rented out the rental property for three years and it holds its own.  I have rented out my basement, garage, and driveway for an RV and play house for income.  I even rent out my motor home occasionally for a few extra $$.  I have no consumer debt and two mortgages. No credit card, LOC debt or any other debt.

We have talked about her contributing more towards the living expenses but she resists the idea.  We split the cost for food.  I would like to rent a room but she is against the idea.  She sends $300-$500/mo to support her 30 year old son in Moscow whom in my opinion is too lazy to get a job.  She travels to Russia at least once a year to visit family.  She has taken over all the closets which are full of her stuff.  I have one small closet for myself.

Am I out of line to expect more contribution from her?  She does some domestic duties:  a little cleaning, cooking and laundry but never pays any rent or contributes to the mortgage.  This really bothers me because she seems to be getting a free ride here.  The old fashion idea of the man provides for a wife to me just can't work these days.

Your opinion matter to me and I want to know what you would do in my shoes?

Gail says: 
I believe each of us has a responsibility to take care of ourselves.  However, very often couples enter into agreements, implied or explicit, that has one person assuming more financial responsibility. Stay at home moms, for example, count on their partners to bring home the bacon.  That being said, if your circumstances have changed, then it's time for a talk about how the responsibilities need to be re-shared.  You are sounding a little put-upon... "She has taken over all the closets which are full of her stuff.  I have one small closet for myself."  Hey, you let her assume that was okay while you were working, right?  And you seem resentful of her other commitments, "She sends $300-$500/mo to support her 30 year old son in Moscow whom in my opinion is too lazy to get a job."  But that was okay while you were working, right?  So really the issue is the fact that you no longer can keep the boat afloat on your own.  Tell her that.  Explain that if she doesn't help with the mortgage, you'll be forced to sell the house and move to a smaller, more financially-manageable home.  If she's unwilling to put money into keeping the roof over her head, then downsize to something you can carry on your own.

 

Rachel wrote: 
There is a lot of useful information on your site and I certainly subscribe to your philosophy of money management.   I just can't seem to find a definite answer for my specific question regarding a vehicle purchase.

We have previously always bought second hand vehicles outright but my husband's own business requires a truck and we do not have the funds available (apart from our emergency fund) to buy anything other than a beater outright.  As it will be used as a family vehicle in addition to work we have browsed newer, more fuel efficient, safer models but of course they come at a premium price (30 - 40k new, 20 - 30k used) .

My parents are strong advocates of "never buying new" because you lose money as you drive off the lot. Whereas my in laws believe that the savings in repairs, maintenance and fuel for a newer truck are worth the price.  Either way we need to secure some sort of financing (I know, I know BAD debt) and I am so confused by the options.  I feel totally inadequate to make this decision regarding two things I know nothing about a) financing and b) trucks!!!

The one thing I don't get is when they say the interest rate is 2.9% but when you calculate the total amount you will have pay after x dollars per month for y months it is way more than the cost of the truck plus 2.9%.  I have googled/wikipediad/ask.comed my questions, to no avail - nobody seems to be able to make this make sense to me.

Gail?  Help me please!!  We have no other debts besides our interest free mortgage (with my father-in-law) and one full and one part time income.  I feel like I have been sensible with our money and avoided bad decisions so I'm scared of inadvertently making a colossal mistake. Thank you, Rachel

Gail says: 
Your misunderstanding comes from assuming the 2.9% is applied only once.  The interest rate applies to every year there is a balance outstanding, which is why it usually reads "2.9% per year."  So if your loan is for 5 years, you'll pay 2.9% on the outstanding amount each year for five years.  However, the interest is also calculated on the "declining balance" so every dollar you pay off  your loan, that's a dollar less that accrues interest.  Use an online calculator to check the interest cost if you still need to. 

 

R wrote: 
I am 28 years old and my husband is 30.  We own our own place with a mortgage of $230,000 at 5% interest rate (22 year amortization) and we put $50,000 down payment to get this place.

My husband purchased a second property with a friend of his as an investment property for $350,000 before we had gotten married.  He took out a $40,000 line of credit loan at 3.55% to do this.  Currently we are making $750 a month payment to pay off this LOC as soon as possible.  After covering all other expenses, this leaves us only $100 a month for emergency fund.

Also, the apartment is rented to a great tenant.  He pays $1300 a month, so it covers the mortgage and strata fees easily.  My husband and I have a combined income of $100,000 a year.  My question is, with the rising interest rates, is it a good idea to carry a mortgage on 2 properties?  I feel like we would be in a really tight spot if we hold onto the investment property, and interest rates rises.  Then we would be paying the difference from out of pocket on that $1300 the tenant pays .

My husband refuses to sell the investment property and clear the Line of Credit.  However, I have told him I am in no financial shape to have a family with the two mortgage idea.  I want the peace of mind in knowing we have our main $230 000 mortgage that I know we can easily pay for even if interest rates rise.  So am I valid in my point to sell the investment property and clear the line of credit?  Other than this mortgage and credit line debt we thankfully have no debts (no student loans, car loans, credit card loans etc etc).

Gail says: 
Since the line of credit was used to finance the down payment on the investment property, the income from the investment property should be used to pay down the line of credit.  That should free up some money in your personal budget for your own saving.  If the investment property is carrying itself, I see no reason to sell it.  However, if you are very uncomfortable with your family's debt exposure, your husband needs to make sure you are "safe"... and that you can get on with your life as a family together.  If he can't do that, if you're living too close to the line, you'll have to work together to find a solution that makes you comfortable. 

 

R wrote: 
Hello Gail, I am a huge fan of your show!
My question is this: I am currently on maternity leave.  I recently sold my company as it wasn't doing well.  Now I have a debt of $15,500.  Last year was a good year and I put extra money on my RRSPs with the idea that if I needed it I would take it out.  Although interest rates are low, I am wondering if I should take out some funds (half) to help with the repayment of the debt.

I am unsure if this will affect my Maternity Leave?  Do you think it’s a good idea?

Gail says: 
Any income you take from an RRSP is considered "income" in the year you take it, which is why you have to pay tax on it.  It will most certainly affect your mat leave benefits, maybe not initially, but when it comes time to calculate your taxes you may find you have to repay a whack of those benefits in tax.  I would not take money out of an RRSP to pay off debt.  I would find another way to make some extra money, or trim expenses, to take care of the debt. 

 

S wrote: 
I have been watching your show for years now and love your approach and advice for couples.  I am a needing some help myself although I do feel I know the root of my $ problems and have committed TODAY to fixing them.

I am a compulsive gambler and have been for 15 years!! I know bad!  I have kept this a secret to my family the whole time.  The guilt and shame I feel is horrible and I want to be done with it forever.....so needless to say I have racked up $22000 in debt.   I have 2 credit cards both have an interest rate of 19.95% with a combined amount owing of $10500. I have an unsecured line of credit with $11500 owing.  I wanted to increase the line of credit to take over the amounts owing on the cards and cut up the cards.  The line of credit is at 6.25%.... the bank refused this when I called.  What do you suggest?  I would rather make 1 payment a month than 3.  I have $7000 in RRSP and I know you say to not touch this.  I am still contributing $275 a month to this.  

I make a good income and there is no excuse for me to have any debt.  We have equity in our house of about $220000. Which is nice and the house will be paid off in 6.5 yrs.  I bring home about $3500 and only have to buy the groceries and gas for the family. I also want to start a RESP for my daughter who is 12yr.  I need to start a house account too for repairs etc.  I would like to be able to be free of my hidden debt ASAP.  I am sorry to give you such a long question but I really idolize you.  I wish you were my Mom.. Haha.

Do you think a loan is a good idea to combine the debts?  I am not sure where to go from here?  Any advice is appreciated.

Gail says: 
If you are in fact committed to fixing this mess, now it is time to pay the piper.  You must never again go anywhere that would allow the gambling to take hold.  And you have to work hard to pay off the debt so you're not tempted to rack it up again.  Are you in a program of some kind to help you deal like gamblers anonymous?  I strongly recommend this.


As for the debt, you'll need to make the minimum payment on the line while you pour all your energy into getting those high-cost credit cards paid off really quickly.  You should be making payments of about $1000 a month against those cards to be free of them in about a year.  If you don't have the money to do that right now, then get another job.  Do whatever it takes to be rid of that debt.  Once they are gone, you can focus on the line of credit.
This won't be easy.  But if you are committed it can be done.  Let's see if you are as determined to be debt-free as you say you are. 

 

S wrote: 
Hi Gail - looked through your site but can't find an answer.  My question:   our two children, age 6 and 10 have a paper route - are they too young to open and RRSP and start contributing part of their income into it?  Right now they put 10% of their pay into a savings account.  Thank you Gail.

Gail says: 
Anyone in Canada under the age of 71 who has filed a tax return can contribute to an RRSP. So they aren't too young.  But you'll have to have them file returns in order to quantify their contribution room.  Since they won't be paying tax (they likely earn too little) they should not claim their contribution.  Hold it until they have taxable income and then claim only as much as it takes to move them into the lowest tax bracket.  In the meantime, the money will compound tax-deferred. 

 

T wrote: 
I just found you and my boyfriend and I love you, are having so much fun watching your program every day and we are learning so much!!

I have a mortgage for approximately 139,000 @ 4.4% and I am due for renewal in March.  I've been offered an early renewal penalty free (I work at the bank) for two years at 3.4 %.  The alternative is renewing the mortgage for 5 years at 4.?%.

My question:  Is renewing the mortgage for two years a bad idea?

I thank you for sharing your wisdom and I think it’s great that you try to repair relationships.  I am shocked...yes shocked to see how many relationships get better once people come clean about their debt and spending habits.

I look forward to your response.

Gail says: 
Saving on interest is never a bad idea.  The question you have to answer is this:  where will interest rates be in two years when it comes time to renew again?  And are you getting a better deal on the 5 year rate than on the 2 year rate?  The rate you're being offered for 2 years is pretty similar to everyone else's.  But you're being offered substantially less to go five years than currently available at most big banks.  Depending on what you can negotiate that 4% down to (try for 4.1% which you can currently get at PC Financial) you could find yourself with a nice low rate locked in while rates are rising. Mortgages are long-term things and you need to think about not only what you're paying today, but what you're likely to have to pay come your next renewal.  If you do decide to go with the two-year renewal, keep your mortgage payment amount the same as it is currently so that you really put that savings to work to pay down your mortgage faster. 

 

Watch your show all the time, fantastic someone actually cares to help others out with financial trouble.  My question is, we really don't have any credit card debt, but we just bought a new house and our mortgage is $201,000 and we have a car loan that is $300 a month and into year 1 of a 72 month loan.  After all said and done at the end of the month we will have some money left over, what would be better to pay off/down first, our rate for the house over the next 5 years is 3.75% and the car is 2.9%

Gail says: 
The house is an appreciating asset, meaning the value will go up over time.  The car, on the other hand, is a depreciating asset, so you should focus on getting rid of that loan first.

 

Hi Gail, my girlfriend and I have been fans a few years now.  I finally got the courage to write you due to my dire financial situation, so here goes...

I noticed on your show that there are many people who are in much worse situations than we are but I still think there is a lot of room for improvement.  I used to be the only one in our family (girlfriend and I) taking care of the finances but my girlfriend does show interest in fixing our financial situation.

I currently have my car sitting in our garage in our condo due to the fact that we want to save money and we're both taking public transit (Metropass).

Currently, Our net income per month is approximately $4000 a month and our expenses are approximately $3000, give or take 25 bucks a month.  We spend $240 per month on public transit, too much on food (eating out, yes I know.. You’re going to grill me, but realization is the first step to fixing a problem) not much on entertainment or other stuff like that.  We pay $130 for cable/internet (even after calling and trying to bargain with the cable company). $90 a month for 2 cell phones.  Approximately $550 per month to pay down our credit card which is at 5.99% interest rate,(approximately 17,700 on the card left to pay) , $100 per month to pay off my line of credit @ 9% interest rate (approximately $9700 left on that) and it's on interest only right now.  Mortgage, maintenance, hydro and gas are approximately $1500 per month.  (1 year left on my current mortgage @ 5.25% and approximately $157,000 left on it.)

We created a budget and stick too it, as well as we both contributes at least $100 per month each to RRSPs and at least $100 each per month for savings.  We don't quite have an 8 month emergency fund.

I know I need to sell my home but please help me manage my money better so I don't have to worry about what happens if we lose our jobs.

Thanks Gail :)

Gail says: 
I'm not sure why you think you need to sell your home.  You're pretty close to the 35% recommended for housing.  Your problems are related to your high LIFE costs.  Cancel the cable completely.  If you're serious about becoming debt free, use that money, and whatever extra money you can come up with -- you look like you should have another $900 or so -- to get rid of those debts. If you want to watch a movie, allocate $5 a week of your entertainment money to rent a movie.  Or better yet, go to the library and borrow one.  Stop eating out.  Cook at home.  Entertain friends with dinners where you each bring something to the meal:  you can enjoy good company and everyone shares the cost.  Based on the numbers you've given me, you're perfectly capable of getting out of debt in under two years if you're prepared to really focus on becoming debt free.  So, now, just do it.