May 2011 Questions & Answers

 

 


My wife has recently quit her job and we are looking at revamping our budget to make ends meet with her either staying at home or working part time. One of the options we are looking at relates to our mortgage. The Synergy Mortgage Plan supposedly would allow us to pay off our mortgage much more quickly and with lower payments. This is done by borrowing against the value of our house. Our mortgage is about $328,000 and the value of our home is approx $850,000. Our investment is fully insured and the return on that investment helps us to pay off our mortgage more quickly. In our case I believe about $300,000 would be invested. My concern is that this sounds too good to be true and that even though the principle is insured that we are fully leveraging ourselves. Are you aware of this type of mortgage product and do you have any advice on how to fully research this to ensure we aren't doing anything risky with our mortgage?

Gail says: 
So your current mortgage would remain on the home at $328K, and you'd take a new line of credit or collateral mortgage for another $300K for investment purposes, and then use the return on your investment to help pay down the mortgage faster, with the principle on that investment being fully secured, does that sound about right?

Okay, so here are some questions to ask:

1. How much do you HAVE to repay on the line of credit portion of the overall loan each month?

2. What's the interest rate you'll be earning on the investment? Is that guaranteed to keep pace with the loan interest?

3. What's the interest rate you'll be paying on the collateral loan? Is that guaranteed to remain the same or at least in line with the interest you're earning on the investment?

4. Since the income you earn on the investment is taxable, have the examples you've been shown factored in the tax you'll have to pay on the interest part of the investment?

5. How much is actually left to pay down the mortgage once the interest cost and taxes are deducted from the investment return? I know the interest on the investment loan is tax deductible, so that must be figure into the calculation too.

6. How does the investment with the principal guarantee compare to other similar investments? If the return being quoted (when I looked it was about 8%) seems high (which this does), how does the investment manager plan to achieve that return consistently?

7. When will the house be paid off in full? At that time, what will it have cost you in interest (total on both loans)? How much will you have saved by using this approach?

If you do not feel confident in the answers to these questions, walk away. If you feel you understand completely how this works, AND your accountant has verified the numbers for you (a fee is well worth not stepping in a huge pile of poop) then you'll know you're on the right track.

 

I am a 23 years old with a two year old boy, a one year old girl and a 23 year old fiancé. Over the past 3 years we have racked up a debt that as it sits now is eating us alive. We bought a house at the end of the economic boom and had a second child.

I am now working 3 jobs just to pay the mortgage, utilities, and food (baby supplies). We have credit card debt roughly $9000.00, line of credit maxed out at $5000.00, property taxes $3000.00, a loan for $30,000.00 as well as a $245,000.00 mortgage.

I have lost all hope, interest rates and late fees are running us into the ground, were facing having to sell our house for less than we paid for it, just to rent a smaller place for the same price as our mortgage payment. I am not sure what to do anymore!!! My relationship with my fiancé is diminishing all because of debt and I don't want to lose her.  Can you help?
What can I do? I've been to the banks trying to work things out but they have turned their backs on us.  Please help me!

Gail says: 
Honey, I strongly recommend you get yourself to a bankruptcy trustee (there's a link to one on my site) and get some advice. My sense is that you'll likely have to declare bankruptcy to get out from under all this debt. You don't say what the $30,000 loan is for; if it's a vehicle loan that may be a loss for you. But if you have no equity in the home and your payments are up to date, you'll likely get to stay in the house, with most of the other debt gone. Do not delay. Drowning makes no sense. Find a reputable bankruptcy trustee and get some advice on what to do next.

 

I love your show and watch the re-runs to catch the good advice I missed the first time around.  I have managed to catch Princess on occasion as well, but find I don't have any patience with the younger, "I want everything now" set.  God bless you for taking them to task and making them see reality.

I have a couple of questions, and have searched through your site but couldn't find anything exactly like this.  Here goes....

When it comes to paying a mortgage, I know that it is advantageous to accelerate payments.  I currently pay bi-weekly, and considered bumping up payments to weekly, but read somewhere that such action was discouraged because, "there is no appreciable difference in increasing from bi-weekly to weekly."  Is this statement true?  Why or why not?

My second question is a follow-up to one from your Q&A section this month.  You recommended that a person make their RRSP contribution at the beginning of the year (i.e. in March).  A banker once recommended that I spread my payments out over the course of the year to take advantage of the varying purchase price as the market fluctuates.  Is this really prudent or simply a good sales job by the banker?

Gail says: 
There is a small advantage to paying weekly over paying weekly over paying bi-weekly. Go to an online calculator like this one at the Royal Bank
https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi, put in your numbers and see for yourself. Change the frequency to see how the payment amount changes.

Your banker and I are actually talking about two different things. I am trying to encourage people to make their contributions earlier, instead of waiting for the deadline. Your banker is encouraging clients to take advantage of dollar cost averaging by investing monthly. It is a prudent strategy, not just a good sales job.

 

I am 27 years old and I work for my local public library. The city automatically takes out about 9.25% from my paycheck into a pension fund. I know that you recommend saving 10% for retirement. Since the 9.25% are placed in a pension plan, do they count as part of those 10% retirement savings or should I open a 401k plan as well? If so, how much should I place into a 401K?    

Gail says: 
You're doing fine. At your age, you're saving enough in your pension plan and have loads of time for those savings to grow. If having more at retirement is important to you, then go ahead and open up a 401K, and base your contribution on what you feel you can afford to save. From here forward, each time you get a raise, give 20% to your savings, and keep the rest for yourself to keep growing your long-term savings. How does that sound?

 

Gail - I need your help.  What happens when you become too overprotective of your emergency fund and are afraid to use it, even when it's a legitimate need?  We have worked so hard to build a stable emergency fund - by the end of this year, it will be at a nice $10,000.  Now last week I had the unfortunate luck of being hit by a run-away spare tire.  The person was unaware that they had lost their tire, and didn't stop so I have no way to contact them and get their information.  My daughter and I were unhurt, but our vehicle suffered extensive damage, so I have to go through insurance to repair it.  This means covering the $1000 deductible for the repairs.  Now this seems like a great time to pull from that emergency fund. But I'm so darn protective of that fund now that I'm trying to figure out how I can cut spending and pull together that $1000 from my regular monthly budget for October.  Is this crazy? Am I crazy, and is this a true emergency?  To pay from my monthly budget, it would mean not contributing this month to the new car fund and planned spending account.

Gail says:
First of all, I am so glad that neither of you were hurt. And this is exactly the kind of emergency that you have an emergency fund for: something unforeseen that you never have predicted. That being said, if your options are to pay for the emergency from your EF or hold off on the new car fund for a couple of months, only you can say what has the highest priority. You need to do what feels right to you. But you also need to be able to use that EF when the need arises, so maybe this would be good practice. Perhaps the solution is to use the EF and then cut your new car contribution back until the EF is back to your target even if that takes a couple of months. Would that work for you?

 

I love your show! Keep up the good work. I have one question please.  I am on Chapter 4 in your book by the way. Maybe a little ahead of myself here, but I'm trying to find out how much money is supposed to be allotted for carrying in my pocket. Is this the "other jar"?? How can I figure this out?

Gail says: 
Are you asking me if you can have "pocket money?" The point of the jars isn't to keep the money out of your pocket, it's to make you conscious about your spending. If you plan to spend some money on groceries, entertainment or gas, put the money in your pocket. Bring home the receipts and allocate them to the appropriate jars. Make a note in your Handy Dandy Budget Binder or in your Spending Journal, whichever you use. Think about what you're planning to spend your money on, and then be accountable for what you did spend it on by allocating it to the appropriate section of your budget. That's conscious spending.

 

We're not financial experts, so how do we know the investment advice we're getting is in our best interest, and not what's best for the advisor?  My husband and I are both 55, and have been investing faithfully for 25 years.  I know everyone's investments have suffered recently, but we just don't seem to be getting anywhere near the high figures you quote people should have upon retirement.  Between the two of us, we now have approximately $250,000.  We'd appreciate your guidance.

Gail says: 
The "high figures" I quote people is not what they should have, but what they will have if they stick with the amounts I've suggested and reinvest their tax benefits. It is usually based on an average return of somewhere between 5 - 7% (depending on the year we're shooting) over the very long term (when I'm working with very young couples). As for ensuring the investment advice is right for you, you have to start by understanding three things: your knowledge, your time horizon and your risk profile. My latest book, Never Too Late, which will be out in early December, can help you to define for yourself the types of investments you're best suited to, and explains very clearly how different rates of return affect your portfolio's growth. You still have 10 years to go before retirement, and all things being equal, you should see your money grow substantially over this last decade. If you belong to the teacher's union (tldsb) then you'll also have a very healthy pension plan, which is part of your portfolio.

 

After some good advice from you last year, my husband & I decided to put off buying a house until we had a proper emergency fund and more money down.  Good thing to, as a month later my husband was laid off from his job.  He was off work for 3 months, and it took the full 6 weeks to get any payment from EI.  When he did find work, it was for $15,000 less a year than he had been making, plus we lost our family benefits when we have medical expenses of +$150 per month. 

Between lost income from the layoff and my changing jobs in August and his changing jobs again in the last 2 weeks, we have dug ourselves into a $5,000 hole.  We will be getting benefits again at my new job in the next 2 weeks which is a huge help.  We both have pensions now - 6% + $25 bi-weekly for me & 4% plus $100 monthly for him.  I am 30 and currently have only $500 in RSP's, he is almost 37 and has $5,500.  We have started an automatic savings plan through our bank of $200 per month just this month to try to get a real emergency fund going.  Our only real savings is $17,000 in RESP's we have saved for our 2 daughters.

My husband will be making closer to his old salary at the new job, but will have the option of a lot of overtime for the next 3-6 months which will give us a boost of +$1,500 a month for the time being.  We are currently paying $400 per month on our $5,000 credit card debt at 19.5% interest and put our cards in the freezer so we can whittle down the balance.

My question -- while we have the extra income where would you prioritize between paying down the debt and building up the emergency fund & our RSP's? 

Gail says: 
Prioritize rebuilding your emergency fund and paying off your debt (1/3 to 2/3). Once the debt is gone, if the EF isn't all the way back up, focus on that. Then start adding to your retirement savings. You've weathered this storm well. Congrats on holding your downside to just $5K. You'll be back on your feet in no time.

 

Hi Gail:  (Huge fan by the way!)  My husband is in the US Army and I am a newly stay at home mom.  We have been married almost 5 years, have no credit cards but only have about $1500 in savings so far.  We were living pay check to pay check but after watching your show we have started using cash jars which is working great!  We owe $19,617 on a vehicle; we took out a personal loan at 2.99% to finance the vehicle.  My husband is getting out of the military in June 2012, and is currently looking for a civilian job.  My question is this....my husband should be getting promoted next month which means we will be getting an extra $600 a month, is it better to pay that extra in principle on the loan to pay it down faster, is it better to put the money for savings when he gets out of the military, or should we alternate paying more principle one month and saving another month? 

Gail says: 
I'm the girl who believes in balance and that doing any one thing to the exclusion of all others is a bad idea. If it were my money, I'd split it 60/40 between paying down the vehicle and building up an emergency fund with the 60 going to the emergency fund.

 

Gail, I know you are in Canada and I am in the United States.  I watch you every Saturday night and I really value your advice.  My concern is about my daughter.  She spends much more than she makes and is constantly behind on her mortgage, car payment and her bills in general.  She does not even open her bills when she gets them and naturally owes everyone.  I honestly think that not paying your bills is technically stealing from your creditors.

I fear for my two grand children and I truly believe that her spending and lack of financial responsibility is going to cause her marriage to fall apart.  Sometimes I want to help her but I feel that she is not learning anything and I do not want to an enabler.  I have been there with her before.   How can I help her without being a pain and treating her like a child?  She is 35 years old.

Gail says: 
You could stage an intervention, along with her husband and anyone else who feels there is a significant problem with her spending. It might also mean getting your religious advisor or someone else she really respects into the equation. She may need to go to debtors anonymous or seek help from a therapist to deal with her shopping addiction.

I'm afraid I don't have anything else to offer. Sadly, some people just can't see the damage they are doing to themselves and their families. You have to give them a big wake-up call before they can hear the message.

My heart goes out to you. I can't imagine how painful it must be to watch your child on such a destructive path. But you're right; giving her financial help won't solve the problem. This is a behavioural issue, not a financial one. 

 

Having loved watching your show, about a year ago I went in search of any books you may have written and was pleasantly surprised to find that you have some. "Debt-Free Forever" is now my bible! LOL My husband and I have just created a budget with an aggressive debt-repayment plan and are happily on our way to debt-free.  My question is - our mortgage just came up for the first renewal and the bank has offered us a nice, low fixed-rate which I am happy to accept. Then the mortgage account manager and I got to talking and I came up with an idea but, not 100% sure that it is a smart choice. I would increase my mortgaged amount to cover all of my consumer debt (from $210,000 to $285,000), pay off all my debts and take the debt repayment amount of $1800/mth. and make an extra mortgage payment of $1000 every month and use the rest to set up RESP's for our 3 kids, a savings account (we are in our mid-40's and have nothing for retirement) and an emergency fund (I had a motorcycle accident this year and was off work for 7 mths. so an emergency fund would have been nice).  I realize that this will only work if we don't rack up any more consumer debt and it (yikes) spreads our consumer debt over 12 years!!!! but the interest rate is so much lower than on the debts now and our debts AND MORTGAGE would be paid off in 12 years instead of 25!!!  It looks great on paper but I still wonder. PLEASE advise. Thank you!

Gail says: 
If you can lock in a low rate on all your debt, and you have made a firm commitment to getting that debt paid off, I would say you're good to go with your strategy. It is your commitment to the plan you have outlined that will make this work. Or NOT. Fail to follow through, start racking up debt again, and all you will have done is played a game with yourself. Follow through and you'll have made a wise decision.

 

This is complicated. My brother confessed to me that his wife (whom he has been separated from for several years) has been using their personal line of credit as her personal bank. She has taken him to the tune of $210,000. He's in shock and so am I. I couldn't believe when they first separated that he hadn't separated their finances. His kids still lived at home and she had been a stay at home mom so I guess he didn't want the teenage kids to suffer. He lives on a boat and mom and kids live in a mortgage free townhouse. So all mail was going to her and he never asked to look at the bank statements! He wanted to retire in a few years but now he confessed he is so distraught he is somewhat suicidal. What should he do first and foremost?  I have watched you for several years and your voice is in my head while I was trying to advise him. I trust your comments and sound advice.

Gail says: 
Oh my heavens! This is one of the things so many people forget about when they get divorced: you must take your name off all joint credit. I don't like joint credit to begin with for this very reason. Your brother should seriously consider declaring personal bankruptcy and start with a clean slate. There is a lot I don't know about this situation, like whether he still has ownership rights on the home in which his ex-wife lives (that may not have been changed either), in which case he might want to see a lawyer to discuss using the assets in the home to pay off the debt. If he does declare bankruptcy, and she is signed on the debt (as you indicate) she would become fully liable for the debt. Without more info, I have nothing more I can offer at this point.

 

Darin wrote:
Question and Success, thank you-greatly..Love your shows. My Accountant recently told me not to max out on my RRSP and lower myself into a lesser tax bracket. Also, stating that I shouldn't buy RRSP if I am in the lowest taxation. Something about the higher tax paid when I move it to a RIF. I tried to get my head around this but come up more confused. Any thoughts on this? I still pay down the mortgage with excellerated payments and prepay on the mortgage each year.

Gail says: 
The point of an RRSP is to move money you would pay tax on now into a savings pool where it can grow tax deferred until you are no longer working, at which point you can pull it out, pay tax on it and spend it. But if you're going to end up paying more tax on it when you're retired, than you would have when you were working because you're currently in the lowest tax bracket, the RSP doesn't make sense for you. Keep in mind you have control over how much you take from the RRSP (or RRIF) each year, though you must take a minimum (which is quite small). If you are not maxing your contributions to your TFSA, you should do this first, and then make a decision about any other savings you may have money to make at that point. I have a new book out shortly that may help called Never Too Late. Grab a copy at library. It should be there in January.

 

I’ve been told that the RDSP isn’t that great and that there are all sorts of restrictions like the fact that payouts can’t start until the beneficiary turns 60. I have a child with a disability and want to make sure I’m choosing the best option.

Gail says: 
As promised, I’ve done some research for you. And, as I thought, your advisor has been giving you the wrong info.

Generally, there are two kinds of payments that can come out of an RDSP. Lifetime Disability Assistance Payments (LDAPs) are annual payments that, once started, must  continue until the RDSP is spent. LDAPs can begin before the beneficiary turns 60, but must start when the beneficiary is 60. The LDAP has a maximum annual amount, which is set by a legislated formula, based on the value of the plan and life expectancy of the beneficiary.  Disability Assistance Payments (DAPs) are one-time payments from the RDSP that can be requested at any time. However, talk to your bank about their policies on DAP payments. Each bank is permitted to have their own rules or restrictions on these payments.

Some other facts:
-  the maximum amount that you can contribute to the RDSP is $200,000 during the  beneficiary's lifetime, but there is no limit per year

- contributions  put into a plan are not tax-deductible and anyone can put money into an  existing RDSP

- contributions must stop the year the beneficiary turns  59

- there are matching government grants that are based on family  income and the government matching grants can be as high as $70,000 during the  beneficiary's lifetime

However, you should let the plan “rest” (claim no grants) for 10 years before you plan to make the first withdrawal since if money is taken out of an RDSP, you have to repay to the  federal government all the grants and bonds put into your RDSP in the previous  10 years.