March 2011 Questions & Answers

 

 


A wrote: 
Hello Gail, My husband and I am tidying up our budget and have been successful so far (with lots of help from your shows and website!)  Right now, my credit score and his credit score both falls slightly below the average Canadians score.  We pay our bills on time and do have a tiny amount of money in savings.  What I want to know is what to do with these high interest loans.  Both are 29.99%, something that embarrasses the life out of me.  Is it a waste of time to try a bank for a lower interest rate loan, or bite a bullet and go for another loan but at 23.99%, which is still very high?  I often feel like I would be wasting the financial advisor at the bank.  Please help!  Thank you sincerely!

Gail says: 
Any cut you can make to your interest rate means that more of each payment will go to your principle, assuming you don't lower your payment amount.  That'll get your loans paid off faster.  So do it!  But also negotiate to see how much more you can reduce your costs.  And don't worry about wasting anyone's time.  That's what advisors are being paid to do:  talk to you!

 

My husband and I went bankrupt in Sept 1/2009; we have been making payments to our trustee since then.  $740 monthly we are still required to fill in income/expense sheets and pay $$ to the trustee for a total of 21 months.  I have questioned this but I still think it seems wrong to me.  I thought it should be only 9 months...  Help please Gail !!   

Gail says: 
It was only 9 months and then the bankruptcy rules changed.  In the fall of 2009, the new rules came into effect so if you went into bankruptcy after that, you'll fall under the new rules.  Anyone who goes bankrupt now is subject to an income test.  If you have surplus income of $200 or more a month, the bankruptcy period is automatically extended from 9 months to 21 months, if this is your first bankruptcy.  If you've gone bankrupt before, the bankruptcy period is extended to 36 months.

 

A wrote:
My mother expects me to pay for my younger brother's university education, even if I receive no financial help from her.  I don't believe this would even be feasible for me, but how can I turn my brother down if he comes to me for help.

Gail says: 
If your mother were paying for your education and you had to pass it on, I'd get that.  But if she's not and you're going to come out of school with a whack of debt, you'll be in no position to take care of his needs.  As for how to turn your brother down, he shouldn't even be asking.  If you have to do this under your own steam, then you've already set the example he needs to do it for himself. 

 

My husband and I are working on becoming debt-free, as per your book.  We are starting this process with a -$1000 deficit in our bank account (unfortunately).  We have three debts to take care of, hopefully within four years (that is our goal).

My question is - Should we be fixing the deficit first before starting to work actively on the debts (ie: doing the snowball technique) OR is there a way we could effectively start paying down the debts while dealing with the deficit.  My husband is full-time and I have two part-time jobs, essentially working full-time as well.   Any comments would be appreciated.

Gail says: 
If you try to deal with the debt before you fix the deficit you'll simply be stealing from Peter to pay Paul.  You must trim back expenses or make more money so that your cash flow balances.  Now I need to clarify a term here:  when you say deficit, I hear "spending more money than we make".  But if you mean that you're in overdraft, simply put that debt at the top of your list and get it paid off first.  Then you can move on to snowballing the remaining debt. 

 

After using your budget calculator and *truthfully* entering all numbers, I realized that we are running $1400 a month negative due to my drop in income from dealing for the past 6 months when my Dad was sick and passed away in March.

I am a real estate agent and my partner, Art, does transaction coordinating for other real estate agents -- we are both self-employed.  Over the past few years, I cut, cut, and cut our expenses to deal with the downturn in the real estate market, and was living within our means until my Dad got sick.

Unlike many of the people profiled in the show, we have very little consumer debt - $1,400 total (real estate/business fees nearly all).  No car payments.  On our house we owe as much as it's worth (due to the downturn in the real estate market).  Our second house we rent and have on a 15-year loan.  We owe $75,500 and its worth in this market $340,000. We have $13,500 liquid and $110,000 in savings (CDs and my actual Morgan Stanley account worth). Our monthly income right now -- with dealing with my Dad's death -- is $4,500.  Our monthly bills run $5,913.

I know I need to ramp up my real estate business, but I am wondering how much longer I can afford to deal with the recovery from my Dad's death?  Are we OK?

Gail says: 
It is terrific that you have no consumer debt.  That gives you less strain on your cash flow in these tough times.  But you're clearly not going to stay debt free very long if you continue to spend $1400 a month more than you're brining in.  You don't say if the rented house is carrying itself.  Could living in that house with a much smaller mortgage payment be the breathing room you need to grieve?  You DO NOT want to blast through your savings and come out the other end of the grieving process having suffered a major financial set-back.  Are there other things you can cut from your budget until you're back to work full time? 

I send you my best during this very tough time.  I hope you and your partner are holding tight to each other.  This will pass, you will find your feet.  Blessings, Gail

 

Hi Gail, I LOVE, LOVE, LOVE your show!  My friend and I are constantly watching, comparing advice and when we do something right it's always "Oooh, Gail would be proud!"

I'm 23 years old, and starting to get it together financially.  I've never had debt, but always just lived pay check - pay check.  As of January, I contribute monthly to a TFSA ($70), regular savings account ($25), and 2 low risk mutual funds ($160/mth combined).  I have a credit card which I pay off every month and my only debt is for my car.

I recently decided it was time to open an RRSP; however I can only afford to contribute $50/month in order to keep myself alive and still contribute to the other accounts.  (However I figured it was better than nothing!)

My question is regarding the RRSP.  I invested in a medium-high risk mutual fund with the $50/month, but was wondering, would I be smarter to up that investment monthly when I have the money available, or would I be better off to keep it in my TFSA, and make a lump sum contribution come January?  Also, in your opinion, would it be better to purchase a GIC or more registered mutual funds?  I'm not really familiar with GICs, but I DO know you have to use a lump sum (at least $500-$1000) to purchase.  If you recommend it, I will get more info from the bank.

Thanks Gail!! - Natasha  

Gail says: 
When you invest monthly, you take advantage of something called dollar-cost averaging (go look at the investing blogs on my website for more), which is much smarter.  Consider using your RRSP for longer term saving and using your TFSA for emergencies, since never "lose" your contribution room on a TFSA.  I have a new book coming out next year you'll want to take a gander at called Never Too Late, which is all about taking control of your retirement and your future.  Save up!

 

We are house-rich & cash poor.  We have no mortgage on our Canadian home, no car payments, no credit card debt.  We have a line of credit at around $45K.  We also own a home in Arizona.   Is it wise to borrow on these assets?  How can we live a semi-retired life-style without being so house-rich & cash poor?  It takes all our income to live our golf-type (not extravagant) lifestyle.
  
Gail says: 
You've made a common mistake:  putting all your eggs in one basket.  You have loads of equity (although if that line has an outstanding balance you're a dope, pay it off) and not enough income to support your lifestyle.  So you have some options.  You can earn more money.  You can sell some assets and then use the proceeds to build an investment portfolio that will give you more money.  If you just continue to borrow, when do you think you'll find the money to pay it back?  Very often people with lots of equity think it's easy to just take some of that equity to have a great life now.  But at what point in the future will you pay back the LOAN you are taking?

 

I am trying to develop an emergency plan to get out of debt as fast as possible because my father has cancer and I must help him, so far he has been able to manage his own treatment, but he is running out of money and I am an only child.  My husband and me have been trying to get out of debt for years, but when we start a plan we do good things for a couple of weeks or months, but then we start with little mistakes until is too late again.  Also we have a 2 year old child and we want to have a second one, I can’t keep on waiting due to our age and I will hate my self for not giving our baby a brother/sister.  With that said, my question to you is if you think that using 50% of our 401k to pay some, but not all debts is a terrible mistake, I am talking of about $11,000.00 (combined) We are immigrants and we don’t have much in our 401k.  Please let me know which the subsequences of this action may be, since part of our debt is not knowing this system, our country works different and this has been a learning process for us.  I would love to appear in your program with the benefit of the full analysis, but I don’t want to worry my father more than what he already is, he has no idea of our situation.

Thanks a lot, Alejandra  

Gail says: 
In all likelihood, you would not be allowed to take money out of your 401K to repay your debt.  While there is a hardship provision, I don't think debt repayment qualifies... medical bills maybe, but not "I got myself in a hole!"  You would also pay a 10% penalty for taking money out, along with the taxes that would be due for claiming that money as income.

If you are truly serious about getting out of debt, buy or borrow my new book, Debt-Free Forever, and follow the plan.  You must do all the steps.  Taking a shortcut will mean you're not really committed, and it very likely won't work.  But if you're serious and do what I tell you to do in the book, you will get to debt-free forever, be able to help your dad and have the life you want. 

 

Hi Gail, huge fan of your show!  My husband and I were comfortable with our debt load and were saving as well, before our children were born.  Now, two kids later and me not working things aren't quite the same.  I stay home with our children and me going back to work isn't an option we're willing to try.  I've bought your book and was hoping to try budgeting, but it is very difficult as my husband is largely paid by commission.  Our mortgage and taxes are close to 50% of his base pay so we use our line of credit to get us through many months in hopes that his commission (paid every 3 mths) will bail us out and give us a cushion for the next few months.

We've contributed to RRSPs but not much since I've been at home and we don't save because if we have extra we put it on our line of credit.

Lately I've been thinking we should downsize our house to lower that piece of the pie.  My husband disagrees with me because he says we will lose so much moving ie. realtor fees, legal fees and moving expenses.  Our current mortgage is $290K after debt consolidation.  The equity in our home is approx $210K and my husband makes approx $100-$150K/yr.  Our only other debt is $15K on a car with a good finance rate (.9).

Do you believe downsizing is a wise decision given all the costs associated with moving or stay put to continue building equity and just try to buckle down on spending?

Thank you for your time!  

  
Gail says: 
You husband is right about the costs of buying and selling:  it's expensive.  And it does sound like you make enough when all the income is included.  Your problem is one of cash flow management.  There are months when you are very flush and months when things are tight.  You need to come to terms with a couple of things:

1. You absolutely need a budget.  You need to do one that prioritizes your spending based on the income in hand.  So your A budget would cover your most basic needs, your B budget would let you spend some money on clothes and your C budget lets you take a vacation.  Get my drift?

2. You absolutely need an emergency fund.  If one of those quarters doesn’t pan out, that can put your family in a tough place.  And if something were to happen to change your husband's income even for a few months, your family would feel the squeeze.  You need to get busy setting aside six months' worth of essential expenses just in case.  And NO a line of credit is not an emergency fund.

I strongly recommend that you both sit down and make a plan.  Build in some savings, but know that with only one income it won't be what it was.  Just make sure it's even.  Over time (but not too much time), you want to build up enough of a slush in your regular account that you've got those dry months covered by the previous commission cheque, so you're not always running to catch up. 

I have lots of info on my site. Go do some reading. 

 

Hi Gail, First off I am a huge fan of yours and have been watching your show and utilizing your advice for a few years now.

I have a situation here and could really use your help... my fiancee was diagnosed with cancer in 2006 and our medical expenses are huge...we have sold our house and put our savings into treatments over the years...I have been working as much as I can and spend literally nothing on myself...but unfortunately there doesn't seem to be enough hours in the day to work and earn money.

In order to make some extra money I have started working for the Coast Guard... the idea being that I can work 28 days at sea...12 hours a day 7 days a week....which is essentially working 2 months in 1 months time earning me $7398 gross.  On my off cycle (28 days) I have another job lined up which should average about $2000 a month and hopefully be enough to pay for medical expenses and begin saving for a new home.

The only hitch I've come across in this plan is that due to tax purposes or to avoid the government paying us overtime for working 84 hour weeks ...the 28 days I work at sea are spread out over 2 months on paper...for example, I am on my off cycle right now but according to the government I am currently still working at sea.  So I am confused as to what will happen if I am working at another job on my off cycle.  On paper it will appear as though I am working two jobs at once and I'm not sure what that will do to my taxes...will I have to pay more?...will I lose so much money on taxes that it won't even be worth it in the long run?  I have considered finding work on my off cycle that just pays cash but I'm just not sure what the best course of action is.

Any info regarding taxes or advice you could give me would be greatly appreciated.

Gail says: 
You are right to be concerned about the amount of tax you will end up paying since both employers are likely treating your income as if their job is your only job, and not enough taxes will be deducted at source.  You do have a dependant, your wife, and significant medical expenses that will be tax deductible, so the tax bite may not be that big, but it's hard to tell without a year's worth of info.  Are you likely to have the same medical expenses as on your last return? 

If so, use that to guide you. Then go to a site like this: http://lsminsurance.ca/calculators/canada/income-tax and calculate what your taxes should be based on your TOTAL GROSS income.  If not enough is being deducted, slide some into a savings account so you don't end up in a panic later on. 

 

I was suddenly widowed about 2 years ago, assets but plenty of debt and no life insurance....healthy to gone in 60 seconds.  The thing that caused me the most anxiety was, I didn't know how much I had to live on.  Interest rates, mortgage rates, EVERYTHING seemed in a state of flux with this crazy US economy.  I saw your show and thank you for putting the budget on-line and free, it was a Godsend!  And you are, too!  I have been using the jar method for quite a while, and things are starting to settle down.  BUT the most wonderful part of this free fall is knowing what I can spend (if I can take my sister to dinner, or not).  My question is this---I clean my house, including the windows, do the yard which is extensive, and repair everything that isn't completely dangerous!  Do I count my doing those chores as a savings, then put it into savings, or do I just be grateful for the lawnmower and not allocate the savings to anywhere?  Thanks for everything!!!!!!   

Gail says: 
You are definitely saving money by being so handy, but those aren't the kinds of "savings" I'm talking about.  The "savings" on the budget worksheet is money you get each month in the form of income that you do not spend, but set aside for some future date (retirement).  I'm not sure if this applies to you if you're not working.  If you already have enough to live on from your assets (so you're living on benefits that won't end or you are already retired) aside from making sure you have some emergency money accumulated, you may no longer need to save.  Does that help?

 

Hi Gail, my question is on RRSP.  I'm a 39-yr-old whose work place has a pension plan.  Each pay cheque has an amount deducted for the pension (around $4500) and every year near income tax time I contribute the balance of the allowable maximum amount (the other $4500) towards my RRSP so that I max out it out.  I know this is a temporary tax shelter and when I draw out my RRSP I will be taxed, at a lower tax bracket.  Some people have been telling me that since I have a workplace pension plan, I don't need to contribute to a RRSP.  If I do I will be penalized down the road by having less government CPP, OAS, and whatever other benefits are in place for lower income seniors.  I heard some seniors (friends' parents) are getting over $1400 a month (no RRSP) and some are receiving only $500 a month because they have RRSP.  Of course no one can predict what will happen to government benefits and policies down the road.  But I'm wondering if I should stop my RRSP contribution and just save and invest in other ways?

Gail says: 
If you aren't currently maximizing your Tax Free Savings Account, and you're not reaping huge tax benefits from contributing to an RRSP, you could focus on the TFSA (up to $5000 annually) before making any additional contributions to your RRSP and that should help take care of the tax problem when you retire since withdrawals from the TFSA are not taxable in any way.

 

Dear Gail, my girlfriend and I have been living together for many years now and love your show! She has about 25K in OSAP and LOC and is about 35K/year job. Our plan is to tackle her OSAP first (its higher % and smaller) and I helped out with some extra income on this front this summer – it was an ‘investment’ paying better than most banks. I am about to graduate with 23K of my own debt but got lucky with a few big scholarships last year which I set aside and so I have about 10K in TFSA – which I am about to put into a 1 year GIC or similar to get a little boost from it before I use it against my loan. My program ends at Christmas but I don’t graduate until June, so I will be interest free and earning until then at about a 50K/year job. There is also bonus and small, side odd job earnings potential but I’m not banking on it. There will be a few months where I’ll repay loan but not have the GIC out yet but will have money saved by then.

That said my question is how aggressively should I pay down the loan? I know as a rule you say 15% but I am inclined to pay much more aggressively as the debt interest will be higher than any savings interest and I suspect rates will be going up. However, I know I also need to save for a wedding, mortgage down payment, emergency fund and retirement which being 25 can be put off for a few years while we build up a solid foundation. Should I dump the debt quick?  It is foreseeable to have mine gone in a year – and then start saving equally aggressively? Or should I spread it around a little? I didn’t mention but we are contemplating living abroad for a year, working doing a little traveling and hopefully coming out even. The reason I see to spread it around would be to leave having purchased a home that we can rent while we are away as a means of paying down the mortgage.

The goal is, married, student debt free, lived/work abroad for a year and owning something in 5 years on roughly $85K a year. I know it’s a tall order and a long note but how do we get there Gail??

 

Gail says: 
My 15% guideline is just that. If you have the means to pay more or if it requires more to be out of debt in a reasonable amount of time, then more it is. However, don't eliminate all your savings and end up with no emergency fund. It's important that you have some wiggle room. Your goals are aggressive, and I'm sure you'll achieve them. You sound very determined and very clear about what you want. Well done! That's half the battle. As for the "student" episodes, I'm afraid that's the broadcaster's (Slice) call. Start a write in campaign, why don’tcha?

 

Hi Gail, first of all, I really enjoy your show, and I'm looking forward to your new show as well.  I am not in debt. I'm 25, I make $90K/year, I put $450 in an RRSP every two weeks, and I have about $5K in a TFSA, which I contribute anywhere between $200 and $500 per month. I also have a buffer of about $2K in my chequing account, and $2K in my savings.

My issue is that I do not feel I'm saving sufficiently, as I do spend a lot of money. I'm not sure what percentage of my salary I should be spending on a future mortgage, food, bills, etc. and was hoping you could share that information with me.  Note: My bills/future mortgage/etc. would be shared with my partner, who has an annual salary of around $80K.  

Gail says: 
Relax honey, you're doing fine. You could get away with saving as little as 6% of your income since you've started so early. You're currently saving over 15% of your gross. You're doing just fine. Stick with the program and enjoy your life!

 

Hi Gail, I love your show and it's inspired me to do whatever necessary to become DF forever and to teach my son about all things financial so he doesn't get into debt the way I have.  So here's my question: I have a car loan with a 24.9% interest rate. So far I have not succeeded in earning enough money to make extra payments on this loan. (I'm a single mom on an extremely small income and I'm having trouble finding more work). I've tried several times to get my interest on my car loan reduced, however, no matter how many times I ask to speak with a manager I am refused and simply told that there is no way to lower the rate. Is it even possible to have an interest rate lowered on car loans?

 

Gail says:
You don't say how long you've had the loan, if you've missed payments, or what shape your credit history is in. You should check your credit history first and get your credit score to see what lenders are seeing before you go in to ask for a loan. If things are all good, you should go to your local bank or credit union and see if they'll give you a loan at a lower interest rate to pay off the car loan.