September 2011 Questions & Answers

 

 


N Wrote: 
I will be getting an inheritance of about $85,000 from my father's estate. We have an outstanding mortgage of $67,000 on our small business. Currently, I work outside the business and pay the mortgage from my own account. This is then calculated into the business through a personal loan to the business as well as the mortgage then being an expense.

I know it would save me over $26,000 to pay this mortgage off right away as opposed to the 12 years we have left on the term. Would it make more sense to do that and then have the business pay me the mortgage? I do have some room left in my RRSP and I will top that up as well as top up my TFSA with the remaining money.

I enjoy your show and your website so much Gail. You certainly tell it like it is and I love that.

Gail Says: 
You should "loan" the money to the company (so you write up an agreement saying this is a loan to the company, the terms of the loan, the interest rate, etc. and everyone who is part of the company signs it so there's no confusion). Then pay off the mortgage with the money you've loaned the biz. Then the biz pays you back and you invest it as suits you. 

 

T Wrote: 
My daughter has been living with her boyfriend for a year in Ontario and now they plan to buy a townhouse together. He was pre-approved for a mortgage a while ago. Should they both pay an equal down payment and share all expenses equally? Should both names be on the mortgage if he was pre-approved? Both work full time but he makes $20,000 more per year than she does. She has a car payment and insurance of $600 per month and he has his car paid off. No other expenses other than household.

Gail Says:
 
I believe partners should contribute proportionately to their shared expenses based on their incomes. The mortgage would be a shared expenses, the car would not. If she is going to contribute to the downpayment and upkeep for the home, her name should absolutely be on title of the house. Both names do not have to be on the mortgage.

 

S Wrote: 
I am a freelance actor and my monthly pay varies. I have worked very hard over the years and now two of my three credit scores are around 750. To supplement my income I teach at a college three nights a week and I teach a fitness class. Teaching the fitness class removes the cost of fitness from my budget and provides gas money. Teaching also allows me to have a teaching grant to finish my doctoral degree at no cost to me. I have also cut at least $400.00 from my variable expenses

I have a binder ready, I have envelopes (instead of jars) for my cash. But I have no idea how to create an annual budget when each month my pay is different.

Gail Says: 
Working with a variable income isn’t as hard as people think it is. The first step is to set yourself a “salary” and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time. Decide what your minimum monthly income needs to be to keep body and soul together and this becomes your Salary. No matter how much money you bring in, it’ll all go into a “Holding Account” and you’ll only transfer your Salary into your Household Account for spending.

To figure out your Salary, do up a budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The nice-to-haves like clothes, cable and beer don't make this list. However, savings and debt repayment do. And don’t forget taxes. This is your A budget.

On your B budget go needs like home maintenance, basic clothes, and entertainment. The proviso here is that if the going gets tough, these spending categories can be shorted until the money starts flowing in again.

In good months, you’ll have money left over in your Holding Account. Don’t be tempted to touch it. It’s your cushion. In a month when you haven’t brought home as much as normal, you’ll still have a whack of cash in your Holding Account so you can transfer your Salary to your Household Account.

 

L Wrote: 
Hey girl! Love your show! If you ever get to Indianapolis, you’re welcome to stay with us :) We'd love to have you! Here's my question...can I consider my Roth IRA as part of my emergency fund?  Thanks for what you do!

Gail Says: 
No you cannot. If you ended up using it to deal with an emergency (assuming you could even get at it) then you'd be turning your retirement into an EMERGENCY! 

 

Hello Gail I love your show.  I would like to know if I would put all my bills due at the same time of the month, would that help me with paying my bills easier.

Gail says: 
It's usually harder to pay all the bills when they all come due at the same time.  It makes more sense to match them to when you get paid.  The first thing to do is to make a list of what you have to pay by date.  If your mortgage or rent comes out on the 5th, and that’s the first bill of the month, it goes at the top of your list.  Then put all your bills and the amounts you must pay on a calendar that shows a month at a time.  Now put in your pay days.  Write on the calendar the amount that is being deposited to your account.
 
If you are paid on the 30th of the month, that money will actually be used at the beginning of the next month.  People who are paid twice a month will pay half their bills from the 1st to the 14th with the
money they deposited on the 30th and the other half of their bills with the pay they got on the 15th.  If you get paid bi-weekly, there will be some months when you get paid 3 times instead of twice.  You
need to determine how many months of the year this happens so you can allocate the “extra” paycheque appropriately.  For your budget’s sake, live as if you only get two pay’s a month, and use the “extra” for boosting things like “home maintenance”,  your  “vacation fund”, “savings” and anything that doesn’t HAVE to be deducted monthly.
 
The trick is to pay only the bills for which you have money in the bank during any period.  You may actually have to call some of the companies you deal with and change your billing date.  Keep in mind
that you¹ll have to pay a pro-rated bill when you change your billing date, but after one month it’ll smooth out.
 
Okay, so back to your calendar.  Which bills can be paid from each paycheque?  Do you have to move any billing dates?   Allocate your pay to bills so that you not only cover everything, but have the money you need for things like groceries, gas and transportation, entertainment and whatever else comes out. Go back to your original list and write the “paid” date in beside the bill, so you have a quick at-a-glance list of when all your bills will need to be paid.  Make sure you pay your bills at least three days before the due date since it can take that long for the transaction to actually happen.

 

Dear Gail - I'm very confused.  I have been reading you (and other financial blogs) faithfully, but just don't get one thing. Nearly everyone touts the standard "SAVE 10 PERCENT" rule.  Let me just ask this one dumbassed question:  What is the 10 percent for?  Is it my emergency fund?  Is it my rainy day fun fund? Is it my saving up for X fund?  Retirement??? Or are all these extra funds on top of the "10 percent"? 

I'm also feeling a bit overwhelmed by the amount that I need to save:  I have weekly savings allocated for: vacation, Christmas, school supplies, sports registrations, RRSP, TFSA, the hot tub dream, emergency fund, and now I read that I should be putting away 3 - 5% of my homes value for repairs (that’s $11,000/year???) With all this saving, there's little cash left for living it seems!

Gail says: 
Y'know, all that money you're putting away for vacation, Christmas, school supplies, sports registrations and the hot tub technically fall into "living". The saving 10% rules apply to retirement savings. Emergency savings comes on top of that. All the other things I just itemized aren't technically "savings"... they're "planned spending". You're planning to spend the money right? So they can't be savings. As for the home repair fund... hey, you can blow through a ton of money replacing a furnace or fixing a roof. If 3-5% seems too high to you, find a number that does work. The point is to have enough money so you can keep your biggest investment well maintained without having to tap credit.

 

I am addicted to both of your shows even though I do not have any money issues. I have been a stay at home mom for 9 years and my family manages on one income by budgeting and staying out of the stores. We have a retirement fund, education savings for both children, an emergency fund, cars paid in full and money set aside for vacations. Our mortgage should be paid off in 3 years as well so we will soon have no debt at all. There is no financial reason for me to return to work but I have recently felt a desire to get back into the workforce. My husband feels like this doesn't make financial sense since it would put us in a higher tax bracket. I understand that going to work will have added costs like transportation and child care (for after-school care, summer vacation camps, PA days etc... since my children are still very young) so I can figure out how much that will cost, but I do not understand tax brackets. Could you explain that for me?


Gail Says:
We have a graduated tax system in Canada, which means that the more you earn the more tax you pay. Your Marginal Tax Rate is the rate of tax you pay on the last dollar you earned. As your income increases, you pay a higher rate of tax on each level of income. The more you make, the more tax you pay. And since the income you earn from investments held outside a registered plan is added to your income from all other sources, every additional dollar of investment income is taxed at the HIGHEST rate applicable to your total income. Each province also has its own tax system.

Any deductions you claim will reduce your taxable income and, potentially, move you into a lower tax bracket. There are a number of tax calculators on the web and you can find one, pop your numbers in and see how much you'll be adding to the family coffers.

That being said, working isn't just a matter of money. Yes, it has to make sense financially, but you also must consider the impact on the family and the benefit you'll derive in pursuing your personal development. I have always worked. I am glad I have always worked. When my daughter, at about six, asked me why I worked I told her it was in part for the money so we could live in a nice home and take vacations, but it was also because I loved my work, and I enjoyed what it gave me. We talked about it a few times, and she has grown to understand that work is something that can bring you a great sense of accomplishment and personal satisfaction if you choose wisely.

While you will want to do the black and white calculation, you must also factor in the frustrations and joy you will experience before making your decision. Best of luck.

 

Gary wrote:
I am a long time investor and always look at the hidden costs to any transactions. I have never been able to find out how many the hidden commissions, fees and costs are when buying a bond. Can you give me an overall percentage figure for these hidden costs??

Gail Says:
The bond market operates on a net basis so the fees aren't transparent. You'll have to ask your broker to tell you the costs for buying the bonds you're interested in, plain and simple. The company will pay an institutional spread, the bond desk will charge a premium above that, and your broker will charge a commission. You want to know what all those numbers are.

If you buy a bond for $10,000 you’ll likely pay about $100 on that bond. As the size of the transaction goes up, the commission tends to go down. Advisors tend to charge a higher commission on corporate and strip bonds.

www.canadianfixedincome.ca reveals the bids and asks on a wide variety of bonds, and you can use that to help gage whether what you’re paying in fees is fair. Dealers are also required to have a commission grid, and you can ask for that. They have to give it to you if you ask.

Don't assume that because you go to a discount broker you're getting the best deal. While some discount brokers are very reasonable in their fees, others are charging far more than, perhaps, a discount house should.

 

J Wrote:
I consider myself a pretty good saver - I'm single, under 50 and expect to have my home paid off in about 5-6 years. I own a cottage (no debt owing on it), have my 6 months of living expenses saved up and my retirement plans are in order (I plan to work to 60). I save about 10% of my net income, so my question is since I have all this in place, is it okay to spend everything else I make? I like to travel and I'd like to make some home purchases. Which leads me to my second question, if you don't mind. I watch your show regularly and you say that people should save 3% to 5% to spend on home maintenance each year. In my case this would be $15K to $25K which is almost impossible, unless I want to eat Kraft Dinner each night. Is this an amount that should be available (i.e. saved), or do I really need to save this much each year? If yes, than you've also answered my first question about being able to spend what's left over - there won't be any.

Gail says:
With property values rising so quickly in the past decade, it may be time to revisit the 3-5% rule! I have been telling people that if your land value is a big part of this, to use only the replacement value of the home itself. And, of course, once you have a healthy fund built up, you can slow right down on the savings.

It sounds to me like you're doing fine. If you're confident that you will have all you will need at retirement using the 10% savings rule, then you should be enjoying your money and your life. That is, after all, why you've worked so hard. Well done on having it all in place.

Would you be interested in writing a guest blog for my site on how you did it? If find these "true stories" to be extremely inspirational and it sounds like you had a solid plan in place. Would you be willing to share?

 

A Wrote:
My question is more do to with getting into debt than getting out of it... I have no consumer debt, no car loans, an emergency fund and a three-month fund set up. My mortgage will be paid off in 5 years and I currently save 10% of my income for retirement and have since I was 21. Things are looking great and I love the plan of having no mortgage by 35yrs old. My financial advisor recently suggested that instead of paying off the line of credit mortgage account we invest the maximum amount into our retirement fund and continue to pay on the account for another 18 yrs to boost our retirement savings. I'm so close to debt free completely that I'm questioning this strategy, but know that if I had been able to do this at 21 I would have. What do you think? Keep with the current 10% a year and be debt free or go for the RRSP payload and payments again?

Gail says:
Why would you willingly choose to pay interest when you could still have a fab retirement plan just by being committed to the process? Pay off the mortgage. Whatever your advisor is suggesting you invest, calculate what the monthly repayment amount would be. Now make that your monthly contribution to your investment portfolio. You'll not have to pay interest. You will be dollar-cost-averaging into the market, and you'll have a healthy balance sheet and enough time to make it all work in your favour. How does that sound?

 

K Wrote:
My employer is downloading extended health benefits cost to us. My portion will double and I will be billed almost $230 per month. This is for LTD as well. When is it better to opt out so I'm not "insurance poor"?

Second - how can I tell if it's wiser to move to a smaller home but incur a larger mortgage as my friends are encouraging me to move out of my 4 bedroom older home with many looming repairs in favour of a smaller more manageable home, but my mortgage will probably increase.

And in case you need to know, I'm a healthy 51 who has rarely used her benefits and I have life insurance outside of work.

I'm newly single and have one 15 year old son left at home and would really appreciate your opinion on these issues!

Gail says:
If you gave up your benefits, and were to become disabled, how long could you sustain yourself on your savings? You certainly won't qualify for individual disability insurance at your age (anything you could afford). But the big question is what does the definition of "disabled" cover in your current policy. And what else is in the package. I currently pay almost $200 a month for LTD and life insurance, so I don't see your $230 as all that expensive. It's a matter of priority.

As for the home, this is a math question: when you factor in the cost of the maintenance on the two homes, which makes most financial sense? Do the math. Don't guess.

 

T Wrote:
Just wondering which is the best option for my wife and I from a tax position? We had our first child a couple weeks ago and my wife is going to take the full 52 weeks mat/paternal leave. She will receive the full amount plus a top up. I am also going to take 8 weeks paternal leave. My question to you is: Would it be smarter for me to let my wife collect EI for the full 52 weeks and I go without any income for the 8 weeks I have off? Or should my wife take 44 weeks EI and I take 8 weeks? Will it make any difference with me being in a much higher tax bracket?

Gail says:
Good question! While EI is taxable income and I've heard horror stories of people claiming EI only to watch the whole thing taxed back because their pre-EI income is so high, this only applies to regular benefits. Special benefits, like mat leave and pat leave do not have benefits that must be repaid so it makes no difference who collects the EI benefits in this case. Make sure you have a healthy bridge-fund saved for those 8 weeks you're taking off without pay.