June 2011 Questions & Answers

 

 


We are looking to convert to a RIF before the end of this month. Bank literature refers to the owner of the government-mandated RIF as 'annuitant' and says that withdrawals are time-limited. Is a RIF an 'Annuity'?

Gail says: 
A RRIF is NOT an annuity. A RRIF is simply a plan registration that allows the money to be treated in a special way by the tax man. The money inside a RRIF must be invested to create a return. You can choose very traditional investments like GICs or you can go with investments designed to generate higher returns like bonds and mutual funds... keeping in mind that the higher the potential return, the higher the potential risk you will lose your capital invested. An annuity is an investment that pays you a set monthly income for a set period of time. You pay a lump sum up front to buy the annuity and then you receive a specific amount of money each month, usually over many years. The size of that payment is higher if you buy the annuity when interest rates are high.

 

I am 25 years old and my common-law partner of 6 years is 29 years old. We are one of these modern families, where the female (me) is the major breadwinner, and we are trying to decide what is the best way to save for our future, in a way that both of us feels is fair.

Our current financial situation looks like this...
My income: $4000/month
His income: $2400/month
Income from basement rental suite: $1000/month
Total:$7400/month

Debt: No consumer debt, only our mortgage which is $306,000 at a %3.79, 5 year fixed rate, amortized over 35 years.

Our combined monthly expenses (mortgage, food, transportation, utilities, insurance): $2600/month (which we split 50/50).

My current retirement savings: $11,000 in index funds in a TFSA (I add $400/month to this amount)
My other savings: $20,000 in cash (Emergency Fund)
My targeted savings: $1400/month (which I want to use to attend medical school in 3 years)
His current retirement savings: $0.00
His other savings: $0.00

Monthly mortgage prepayment: $400 (I pay this - it should save us about $100,000 in interest and 12.9 years over the life of the mortgage)

Our long term goals include saving as much as possible to put a large down payment on an acreage in ten years at which time we can rent out both levels of our current house, which will eventually provide income.

My question is... instead of putting $400/month towards the mortgage pre-payment, would it be better for me to put it into my spouse's TFSA and invest it in index funds for his retirement?

Gail says: 
Why aren't you using an RRSP (and a spousal RRSP) for your long-term retirement savings? If you're taking home $4000 a month, you're likely in the 30% marginal tax rate bracket and have RRSP contribution room of about $10K. If you put $4800 into a spousal RRSP for your partner, you'd reduce your taxes by $1,440. If you contributed the rest of your allowable room to your own RRSP, you might save as much as $3,000 in taxes which you could then use to make a mortgage prepayment. You'd be able to save for retirement and pay down your mortgage faster.

 

We are looking at our mortgage at its renewal time in April, and wondering what is our best bet?  A fixed mortgage over 5 years at 3.35% or a variable mortgage at 2.35% over the same time period. We would be amortizing over 25 years.

A second question, is it ever a good idea to add consumer debt to a mortgage?? The value of the home is $550, 000 and the current mortgage is $289,000. We are thinking of adding all the consumer debt to the mortgage.

Gail says: 
It'll only make sense to consolidate the debt to your mortgage if you swear on your partner's head that you won't rack up another penny in consumer debt. You'll also have to make a commitment to paying down that portion of the debt as fast as possible so it doesn't end up costing you an arm and a leg in interest.

As for whether to go with a fixed or variable rate mortgage, that depends.

• Do you think interest rates are going to go up (choose a fixed rate) or stay the same or go down (variable rate)?
• Can you live with watching the rates (variable rate) or would you be more comfortable knowing exactly what your payment will be (fixed rate?)

Now you can answer the question for yourself!

 

Hi Gail! I watch your show and have recently bought your book, but have a few questions. My boyfriend and I are saving up for a house and trying to create a budget. We both work for the school board and have good pension plans. He has a little bit of debt left on his car (which will be paid off within the year) and besides that we are debt free. We have no savings as of yet, but wanted to know what we should prioritize. Considering we are both getting great pensions, should we focus on an emergency fund and down payment for a house before worrying about putting money into RRSPs? If not, our budget has us able to save about $1500 a month. How much should go to an emergency fund of appx $8,000 (based on 6 months of essential expenses) and how much should go to a down payment?

Gail says:
With your great pension plans you can afford to focus on the emergency fund and the downpayment fund. How you choose to split it depends on when you plan to buy. In the best of all worlds, you'd build your emergency fund at least half-way before starting with the downpayment fund. Then you could go 50/50.

 

Previously, I was making $32,000 a year then I went on EI for 11 months, which cut my wage to 55%. After a 6 month intensive job search, I was hired this week for a job that pays $40,000 salaried.

Issue 1: While I was off for the 11 months, we have practically depleted our savings account. There's under $400 left in it. I am shocked that it lasted so long.

Issue 2: My new company has a Corporate Pension Plan. I've never worked for a company that offered this before. I can contribute up to 8% per paycheck and they will match it dollar for dollar. I will be contributing a minimum of 3% no matter what.

So my question is... now that we have (for us) a significant amount of extra income (from 55% of 32,000 now to $40,000) should we put a huge chunk of money back into our emergency fund and focus on that... or should we do just the 8% Pension contribution.... or should we do both?

We were accustomed to living off the rate I was getting through EI, so now having a larger income is something we are happy about, but we want to use our money wisely.

Thank you so much for all of your budgetting advice - it made the 11 months I was off liveable. I think that we're scared of spending our "new" money frivilously and we want to avoid that.

Gail says: 
Congrats on a) having enough savings to see your through and b) getting a new, better job. You need to rebuild your emergency fund. There's no telling what life has in store, and as you know having some money in the bank make sleeping a LOT easier. To take full advantage of the company pension -- at 8% -- so you can grab all the extra money your company wants to throw your way will cost you about $270 a month. But all the rest of the money you have that is extra into your emergency fund until it's back to cover six months worth of your essential expenses.

 

I am a big fan of your no-nonsense approach; I've read your book and implemented the jars (even though we are debt-free aside from our mortgage). I found it much easier to track, reconcile and budget in real-time as opposed to the credit card statements a month later. So thanks!

On to the question: my husband and I have recently sold our first home and are waiting for our next home to be built (in approx 6-8 months). In the meantime, we'll be living with family. What is the best option to house our equity until we finalize the new mortgage? The bank won't bridge as the closing dates between the two properties are more than 90 days apart. We'll have approximately $150K lying around...

Gail says: 
You are going to need that money in the very short term which means you can't take the chance of putting it in anything that may fall in value. Buy yourself a GIC or whatever other type of VERY safe investment will give you some return. Don't expect to earn a lot, but please do not take any chances with that money.

 

I have always enjoyed your TV programs and respect your sound financial advice.
Can I designate my four children as beneficiaries so that my TFSA account(s) will be transferred to them upon my death, tax-free?  I would not want them to have to pay taxes on my TFSA contributions and growth.  Thank you for your help.

Gail says: 
You may make a beneficiary designation in every province and territory except Quebec. The TFSA would have to be closed and the money distributed. Since a TFSA earns its income tax-free, there would never be an issue of tax being payable. However, making the beneficiary designation directly would mean the TFSA would not have to pass through your estate so that there would be no probate costs associated with it.

Thanks for your show. My husband and I use it for inspiration to keep us out of financial trouble. We think we are doing fairly well financially, but I do have a question about savings. Here's our situation.....We are in our mid 30s with 3 preschool aged children. Between the 2 of us we net about 120K/yr reliably (my husband works full time, I work part time), and then maybe an additional 6K/yr through contract work and on call. We don't factor the unreliable income into our budget, but it does affect what kind of yearly vacation we might take. We save our yearly max for our RRSP once our pension adjustment is factored in. The thing is, we both know that we will never work at our current jobs long enough to collect a full pension and we know if we take a payout once we leave our jobs won't actually be equivalent to the true amount we could be putting into an RRSP. So, are we really saving enough? Right now it would be hard to bump up our contributions into a savings account designated for long term savings as the cost of childcare is sky high!!!!! Having said that, it is most likely possible to dig up a couple hundred bucks a month to save, but it will be much easier once the kids are in school and we only have before and after school care to pay for. We could also stop paying the extra 20% a payment on our mortgage, but we were hoping to avoid that as we'd like to stop doing that once we purchase a small piece of land as a vacation property so really there isn't a difference in our expenses. Our current mortgage is $130K with about 11 yrs left on it. Thanks so much!

Gail says: 
If you don't have the option of opting out of your retirement plan at work, then you'll just have to keep on keeping on. You say you don't think you'll work at your current jobs long enough to collect the full pension, but you may be able to transfer the pension when you move jobs. Failing that, you'll be able to take the commuted value of the pension once it has vested. As for losing RRSP room, your Pension Adjustment will be adjusted to give you back room if that's applicable in the case of ending your enrolment in the pension plan.  Keep doing what you're doing. And stop worrying so much. If you're paying extra on your mortgage, saving above your pension already, and plan to be mortgage free in your 40's you're doing fine. Chill.

 

Just a quick question Gail. I took a loan (at 6%) for an RSP because I made more money this year at temp jobs than I realized and I don't want to get stuck paying even MORE tax.

Is the interest paid on an RSP loan tax deductible? I put the RSP into ING at 2.75% interest for 5 years.

Gail says:  
No, hon, sorry, it's not. It's an interesting thing because if you borrowed money to invest outside an RRSP, the interest would be tax deductible. Hmmmm.

 

Karen wrote: 
I have been spending hours reading your Q&As on this website and found tons of useful info, but cannot find the answer to my particular question, so here goes:

I currently have balance protector insurance on my line of credit, which currently costs $15 per month.  I saw an investigative report show on TV once which said that balance protector insurance is a waste and is useless, since the agreement has so many 'out clauses' for the bank that you will never be able to collect it anyway, if the need ever arises.  I called my bank to cancel it, but they convinced me to think about it some more before cancelling, and since then I just gave up and let it be.

My question is, should I cancel the balance protector insurance and use that $15 to boost my monthly repayment instead?  Is balance protector insurance really worth it, or are banks laughing all the way to themselves?   Thanks so much!   Karen


Gail says: 
A good option in theory, the problem with balance protector insurance is that it is horrendously expensive.
 
Assuming that you have a credit card balance of $1,000 the insurance will cost about $9 a month for a payment protection to make your minimum payments should you get laid off or become disabled.  Many credit cards have a minimum monthly payment of $10 or 2%, whichever is greater, so the minimum payment required on a debt of $1,000 would be $20.  Your $9 per month insurance premium would cover your $20 a month payment.  Does that sound like a great deal?
 
I'm not a fan of any kind of credit insurance.  I often recommend people have private insurance.  But if you don't and you're prepared to pay the big bucks for the coverage offered by balance protection
insurance, you should do so without second-guessing yourself.

 

J wrote: 
My boyfriend helps to support his mother and two younger siblings.  His mother is a retired elementary school teacher but she retired early so her pension is not a full one.  She also has a part-time job but she was recently in a car accident and is temporarily receiving WSIB.  She gets about $2500-$3000 per month.  She is separated from her husband and has been for about two years so that is why my boyfriend helps out by paying half the mortgage (490/mo) and for groceries, about $400 per month. She has had major financial difficulties in the past from over-spending I believe and not buying the right house.  My boyfriend and his brother had to bail her out once before.  And I gather she used to get a lot of collection agency calls in the past.  But she has not learned.  She has about $7000 on her Visa right now and many other debts such as a car, house, some fireplace scam from her old house, and taxes.  She was thinking of selling their home and moving into an apartment with her youngest child but she really wants to stay in the house which is a townhouse with condo fees.  My boyfriend is in the middle of trying to renovate it despite working at least 50 hours a week and not really having the best renovation skills.  I just think she is selfish and unrealistic. Either she could afford to support herself if she re-adjusted her budget or she needs to move as soon as possible.  She complains a lot about "pain" and how she can do very little.  I'm not sure why.  She complained before her minor car accident.  She is about 62 and I feel that my boyfriend and I cannot start our lives together until he feels she is sorted out, yet he finds it difficult to talk to her about her finances because he does not want to criticize her but her worries about her and how she will survive.  I like her, but I cannot get over her selfishness and dependence on my boyfriend.  She made a comment once that I thought was very telling.  She said she does not want him to think she cannot cut it.  I thought she should have said, she does not want him to support her forever because she wants him to have his own life!  She also does not seem to understand how damaging credit cards are if you cannot manage them.  She has a large balance but thinks that because her interest rate is "only" 10-12% that's okay!  I'm worried because it just does not seem like she has learned from past mistakes.  She has terrible credit rating and could not co-sign her younger son's student loan.  She could not get a car loan through the car company and had to go through a bank. I know it's not my problem to solve but I worry so much for my boyfriend and our future.  I would like to know what you think must happen knowing how non-confrontational my boyfriend is.  I love your show and always watch it and I have learned so much, thank You.


Gail says: 
Y’know m’love, your problem is not your MIL and her bad money management.  It’s your boyfriend’s sense of responsibility.  You can’t change his mother.  Don’t even think you can.  You must now reconcile yourself to allowing your BF to do what he feels he must as  “his mother’s keeper” or nagging the crap out of him until your relationship is in tatters.  Or you could just walk away now.  But you will never be able to change her.  Sure, she’s irresponsible.  But there’s nothing you will ever be able to say that will change who she is.  So I’m sorry that this is hard.  And I’m sorry that the woman can’t see that she’s a drain on her son.  But it is what it is and you can only decide if you can live with it or not.

 

M Wrote: 
I am paying a $250,000 mortgage at a 6.5% interest rate. Lately, I have been getting many letters from Wells Fargo offering to lower my interest rate with their "No Closing Cost" refinance. They are offering an interest rate as low as 4.625% for 30 years or 4.250% for 15 years. My and my husband's credit is not great due to a lot of debts that were settled but it is not in poor shape so I might not get my interest rate as low as this but it will be lower than what it is now at 6.5%. I'm a bit scared though. I have never refinanced and my husband is a HUGE skeptic and believes there is a catch somewhere that will eventually come bite us in the you-know-where later on. Is this something I should consider? My husband and I have not used credit cards for a little over 2 years now (but we do have our debit cards) and all of our money goes to bills, however, we do have an overline credit of a little over $2500 and $45,000 that we owe to a family member. We are working on building a budget but if it's not a bad thing to get the refinance on the mortgage, we will consider it - every little bit helps. Should we go for the refinance for the purpose of lowering our interest rate? I have thought that perhaps we should sell the house and get into an apartment but right now the market value of my house is WAY lower than what I paid for it. Thanks so much in advance! Love your show!

Gail Says: 
If you can reduce your mortgage costs by 2%, you will save a ton of interest over the life of the mortgage. However, and this is a big however, you need to read the agreement very carefully (or have someone you trust who is knowledgeable read it and explain it to you) so you know if there are any hidden fees or triggers that might raise that interest rate. I've heard horror stories of perfectly reasonable looking agreements turning into interest nightmares because of one late payment. Make sure you go over it with a fine-tooth comb!