October 2011 Questions & Answers



S Wrote:
I learned about your book only a week ago, and I have devoured it since...before that, I was trying to make some progress, I joined a debt support group, worked on a budget, tried to track all expenses, etc. and used some free debt reduction calculators. However, what your book gave me was different: not just tools and a system easy to follow, but it touched me inside: why did I move to Canada? What I expect from life for me and my children? What are my values and priorities and how I am reflecting them in the way I live...I'm not going to lie: I'm still struggling with the budget and the repayment. I chose NOT to work a second job (for now at least) because I'm also studying towards a bachelor and have two children, pets and a husband to take care of...so I may get a second job when I finish my current subjects...and that means I won't be able to pay down the debt in 36 months, but in about 5-6 years…My question is this: I am an immigrant, my degrees are not recognized here. I know all the process because I actually coach other immigrants through their career development and employment search. I want to work as a career advisor/admissions/counsellor in a university or college or even high school and for that, I need to complete my bachelor. My current job is dependant on government contracts, so there is not such thing as asking for a raise and I may not be working in a few months if the contract is not renewed.

This is a very competitive field where everybody has a master or specialized courses (too expensive for me) and more than 5 years of experience (I only have two). So the bachelor is not a luxury. My other options are to change careers and see whether I get something in office/research/library and they don't pay so much...

I am not eligible for student loans or grants, so I have to pay for all the studies myself. As many immigrants, I came with only two bags, my children, a small debt...plus the expectations from our home country that we will send money every month...

What are your suggestions in these regards? (studies - I need about $8000 more to complete them...) Our credit score is not good: we have not missed a single payment, but we are on the top and may have gone beyond sometimes because of the interest. All but one cards have agreed on reducing their interest from 19.99% to 11% or 12%. The debt is HUGE. We have a mortgage and moving down is not an option, because with the huge debt, even if we sell the house, nobody will approve a mortgage (and we will not have downpayment) so we decided to keep the townhouse. Thanks...your book may have changed our lives!

Gail says:
I get that you have competing priorities: a job, school, kids, husband, along with a whack of debt to repay. And, believe me, I know the challenges of not knowing if you'll have a job next month; I've been self-employed since I was 25 and that's what being self-employed (or on contract) is like. What you have to decide is if you're going to spend hours and hours every month earning the money to pay the interest on your debt, or buckle down and get it paid off as quickly as possible so that you can put all that wasted money towards your schooling. Sure, a better education gets you more money... to spend on paying interest. Or, you pay off the debt first and then get busy with the education. It's a choice only you can make.


A Wrote:
I love everything you do, you are amazing! I am actually a natural over-saver, so you have taught me that I do many things right, but that I also need balance in my life and to enjoy it a little, so thank you!

I know that you normally answer questions about personal finance, but I was hoping you might have some insight into a different kind of finance...I am a part of my local community league executive board, and it is a nightmare sometimes... everyone wants to spend money and no one seems to be accountable for exactly where the money should come from. Particularly, we recently all submitted our "budgets" for the 2011 year, but no one seems to think that there has to be any indication of projected incomes as "that's not part of a budget"... they prefer to look to what they "need" (more wants usually, really) for their program, and how much that might cost. Am I way out to lunch in assuming a budget of this nature still needs to be balanced and include income projections? I am not exactly sure how exactly they can vote to spend money that they don't know they will have.

Thank you for any insight you might be able to provide. Some *simple* references would be very much appreciated for me to bring back to the community board to demonstrate.

Keep up the amazing work - I can't wait to see what is next!

Gail says:
This speaks to the very heart of why people can't manage their money: they don't see it as, first, an INFLOW, and then next as an OUTFLOW. I'm sorry your board is filled with people who have no idea about money management. Usually, there is someone in charge of the INS and OUTS in terms of the money -- a gatekeeper -- who keeps everyone honest. Do you not have such a body on your board? If you don't, you should. And if that person isn't doing the job, get another body.

As for people all grappling to get their piece of the pie, hey, that's the nature of the beast. Not every area of an organization can be a profit centre, or even break even, but the overall has to. And each person on the team should keep that goal front and centre.


K Wrote:
My husband and I find ourselves with an extra $600 every month as a loan has been forgiven by my mom as birthday present. We have a car lease and a mortgage but no other debt except for a $200 a month payment for appliances on a no interest 36 month equal payment plan that will be finished in October 2012. Should we pay that off or make a dent in the mortgage? We both have pensions, save about 15% of our income and we have about 1.5 months of an emergency fund.

Gail says:
Pay off the appliances. Then pay off the car. Then split the difference between mortgage repayment and FUN!


E Wrote:
My question to you is about paying off debt with savings. I recently started a job at a fantastic stable company where I put in 5.5% of my gross income in an RPP and they match it and also they put in between 3-6% of my salary in a group RRSP (I don't have to contribute to this). Therefore, each year I'm saving 14-17% of my gross income for retirement. (I am also 30 years old and single). I own my own condo and have zero credit card debt but I do have a line of credit that is at $23,000 (5.5% interest). I have been trying to pay this off since I finished University (it was $20,000 of student debt originally but to be honest I have put credit card debt on it and other stuff over the past 8 years). It really bothers me and I just want it paid off. I have recently opened a TFSA with $200/month and Planned Spending account with $150/month. I am paying $550/month to my LOC and next year it should be down to about $13000 (by using my bonus to pay it off as well). I have about $14000 in an RRSP outside of my work plans and I really want to use this money to pay off the LOC. Then I can use the $550 a month to add to my emergency fund in my TFSA and live more comfortably without the debt hanging over my head. I know that there is a 20% fee for taking out the RRSP but feel with my work plans I will have a good retirement fund and this $14,000 won't matter too much. Do you think it’s worth it to remove this money penalties and all to feel the weight of the debt be removed? (and if I did do this is it a cop-out for paying back my debt?)

I understand that you must get soooo many questions and know that you can't possibly answer them all so if you can't answer mine that is fine but maybe you could do a blog post on this topic :) :) :)

Gail says:
Any money you pull out of your RRSP will be taxed at your marginal tax rate... the rate of tax you pay on the last dollar you earn. So, in all likelihood, you'll pay far more than 20% to get at this money. In fact, the extra $14,000 could push you into a higher tax bracket. You would be far better delaying your TFSA contributions (which you can always catch up later) and using that money to pay down your debt, keeping that $14K RRSP as your emergency fund (if you lost your job, a lower or no income would mean you'd pay less tax on the RRSP withdrawal, providing you didn't take it all at once.)


K Wrote:
Hi Gail, I just watched one of your episodes where the 2 teenage children in the family were given job jars as well as an allowance in money jars to start a savings, purchase clothing, pay for their lunches out, and for entertainment etc. The parents were then to "keep their hands out of their own pockets".

I am a single mom with a 15 year old who has a constant need for money for all of the above expenses. I am just wondering what is the calculation for an allowance? This is where I struggle. I would love to set this up, but I don't know what the appropriate amount is. Also, how does the job jar work in conjunction with the allowance? I noticed the kids had logs, not sure what was in them, budget or job log?

Gail says:
My e-book MoneySmart Kids deals with teaching kids about money. Have a boo.

If you expect your son to buy some of his own clothes, pay for his own haircuts and plan for big-ticket buys such as camp, a television or car insurance, you’ll have to figure out what each of those things costs. To those Planned Spending items you’ll need to add some entertainment money, some money for establishing a regular savings habit and perhaps also some money for sharing.

I have long recommended that people use the age of the child as a guide, giving a dollar a week for each year of age. So your 15-year old gets 15 dollars plus all the money he needs to cover the expenses (like clothes) you're giving him responsibility for. As your child gets older, review and adjust the amount he receives. Pick a specific time of year – the beginning of the year, your child’s birthday week, the beginning of a new school year – and make the review routine. Ask your child to list the five most important things he wants to do with his money. If your son is looking for a hefty increase, ask him to give you a written proposal or a formal presentation explaining how much he wants and why. If you were asking for a raise at work, you’d have to justify your request. Negotiate the initial amount and attached responsibilities, and implement the plan slowly. Moving from no clothing allowance to a year’s clothing allowance in one fell swoop is a recipe for disaster. Let your child assume responsibility in small increments.

As for the balance between allowance and work for pay (job jar), you have to decide how much of the allowance is for learning about money, and how much you want him to earn. Each job should have a dollar value attached: cutting the lawn = $10 (just an example.) You give him his allowance (including anything you've agreed upon that he must now assume responsibility for, like school supplies). The rest of the money he may need (to buy concert tickets, a new ipod, or a special outfit for prom) he has to work to earn.


J Wrote:
I love watching your show and having been in the credit card industry/collections industry/etc I learned to live vicariously through my customers and never needed to experience the feeling of debt. However, my wife and I have purchased our first house which is closing in 3 weeks. Is there any way to decide on a budget to stick to before we get the home, i.e. no more than $25 for entertainment, etc or do I need to wait 6 months to calculate what we spend and how much we should be spending? Should I calculate the different jars as a percentage of net income and if so what percentages should I use? I would REALLY appreciate a response as I'm trying to avoid getting into a hole in the first place.

Gail says:
Here's what you do:

1. Do a spending analysis for the last six months so you know where your money has been going.
2. Replace your current numbers for housing with the new numbers for living in the home you just bought: you'll know mortgage payments, taxes, you should be able to estimate utilities, and don't forget to include maintenance and home insurance.
3. Add up the numbers and subtract from income.
4. If you're in the black, you're in the clear. If you're in the red, where will you trim to balance the budget?

I have an interactive budget under "resources" on my site that you can use to help you calculate the jars. But the spending analysis is the first step.


D Wrote:
On her May 14, 2011 show on CNBC, Suze Orman was irate about another financial advisor who gave advice to someone about tacking on consumer debt to their mortgage.

It could have been another financial advisor, but I am 95% sure it was you that Suze was talking about. Why? Coincidentally that same evening, CNBC aired your program where you helped Cheryl and Rich, who consolidated several times prior. You specifically said that is typically a good idea, although if you do it you should cut up your credit cards. It was that specific caveat about just remembering to cut the cards up that seemed to send Suze over the edge: She felt you were giving bad advice followed by a silly caveat which just made it even more obnoxious bad advice.

I guess it is fair to say that different financial advisors may have differing opinions on this one, but it’s quite clear that in this case, you are telling people to take unsecured debt, and attached it to secured debt, potentially putting the house in danger, even if someone declares bankruptcy due to the credit cards.

Can you address the difference in opinion? It seems particularly worth addressing, given that your show airs right after Suze's on CNBC. From what I can tell, there is no major difference in US or Canadian bankruptcy law that explains this away.

Gail says:
I haven't seen the episode where Suze was irate (I am flattered that she watches my show), but she and I differ on a bunch of issues. As far as consolidating your consumer debt to your mortgage goes, when I advise people to do it, there are two things I make clear:

1. This is to reduce the interest rate on your debt so you are paying less in interest and more to get the debt paid off, and 2. You cannot leave the debt on the mortgage for the full amortization. You must create a debt repayment plan that has that portion consolidated to the mortgage paid off in three years or less. I've been singing the "three years or less" song for a really really long time now.

As far as making unsecured debt into secured debt goes, that is NOT the issue. If a person intends to declare bankruptcy, I would never recommend securing the debt. Besides, in Canada, you home forms part of your assets when you declare bankruptcy, so it’s not “safe.” If a person intends to pay off the debt, then reducing the interest cost makes perfect sense. My approach is based on common sense. I want people out of debt. I put less emphasis on keeping a shiny credit score (I hate the credit scoring system; it's being horribly abused by all sorts of people) and more on getting to debt free, and then staying debt free.

Suze and I also differ completely on the kids/allowance issue. But differing opinions is what life is about. Ultimately, each individual has to make a choice about what works for them. You listen to what The Spurts say and then you decide what YOU want to do.


M Wrote:
I watched one of your shows and you mentioned that you should be very careful on what child saving plans to choose. I spoke with my uncle who seems to be very wise about money and he suggested the Canadian Scholarship Trust Foundation. Would you use this Education Fund supplier?

Gail says:
Scholarship Trusts are also known as group RESPs and I would never buy a group RESP. The government has done a study that shows they are less advantageous than individual or family plans. I’ve blogged about this. Go read the blog.


J Wrote:
My family wants me to get life insurance through my work. I don't see the need. I have no dependents. My debt (student loans) is in my name only so know one else will be burdened with my credit.

Do you think I should get life insurance to cover my funeral costs? How much does a funeral cost?

Will getting life insurance though my employer now make it easier to get life insurance in the future even if I don't work for the same company?

Gail Says:
You're right that you don't need life insurance if you have no one to protect income-wise. Your family is right in that if you may ever need life insurance, this is the time to buy it. But not through your company, since company life insurance is not portable. If you decide to buy life insurance (if you plan to have a family later and want to protect them, or have assets you'd like to protect tax-wise), then I strongly recommend that you look for a great policy now while it's cheap. As for how much a funeral costs, that depends on how fancy you want it to be. $10K isn't unusual for coffin and services. If you just want them to roast you and put you in a tin, a lot less.


J Wrote:
You refer fairly often to the necessity for life insurance. I understand that families require it, but I am not sure if I do. I am a single female with no dependents, and no plans to have children. I own my own home (which is mostly paid off), and am following your plans to become debt free. I work for the provincial gov't, and get what seems to me to be fairly good life insurance, disability insurance and critical illness insurance. If I die, my will says that my dad will get everything and divvy it up as he sees appropriate. There is more than enough in my savings to cover any debt that I might have, so I won't be leaving him with any financial hardship.

Knowing all this, would you say that additional life insurance is necessary, beyond what I can get through work? If so, can you please explain why? If they're not leaving anybody behind, what is the benefit for a single person to pay for life insurance?

Thank you for taking the time to read this, and for all of the very helpful information that you provide in your blog and books.

Gail Says:
There is no point in having life insurance if you have no beneficiaries and never intend to. It sounds like you have a solid financial foundation and are working towards debt-free forever. If you're sure you won't have anyone counting on your income to see them through, then skip the additional life insurance.


A Wrote:
Hi there Gail, I really appreciate you having this session available on Facebook. I commented on your blog with an outline of my situation, asking other readers for suggestions as well. Basically I am 19, engaged, half-way through college, with 4 years of university ahead. My fiancé and I would like to have kids after finishing school. He has debts and I don't, I have just started a new job (minimum wage) as has my fiancé (his income is based largely on commission). I am seeing so much financial insecurity right now, and I don't know what I should be saving for! Any suggestions? Thanks again!

Gail Says:
Andrea, you need to take this one step at a time. Don’t rush into having children until you’re sure you’re ready financially and emotionally. The fact that you feel insecure financially isn’t how you want to start life with children. And at only 19 you have heaps of time. Your honey should work to get all his consumer debt paid off before the babies start coming. A stable income – or a big fat emergency fund – would be great too since your income will be non-existent while on mat leave. As for what to save for, are you kidding: retirement, emergency fund, baby fund…get busy.


H Wrote:
I have $20,000 in GIC at 1.75% coming due July 28 2011. I have $4,000 in credit card debt and $8,000 on a line of credit. Should I pay these off and start fresh or re-invest the money in the GIC or something with higher interest??? I have another $80,000 in GIC's that are not coming due and another $30,000 in Mutual Funds so I would not be blowing my only savings. Also, $2500 in a TFSA...Please advise!!!!

Gail Says:
Pay off the most expensive debt – the one with the highest interest rate – first.