April 2012 Questions & Answers

 

 


J Wrote:
My husband and I did the stupidest thing ever. We decided to get a hot tub. The low monthly payment was well within our budget. What we did not realize that our hydro bills would almost double, our water bills would go up by 25% and that the chemicals and filters would be so expensive. We did not do our homework. We bought on impulse. We did not investigate all of the considerations of hot tub ownership. Shame on us! We knew better because we know others that have had similar experiences with in ground swimming pools, boats, recreational property/ vehicles --- the price of acquisition fits in the budget and seems reasonable but the ongoing costs are a burden. Love your shows Gail and I am ashamed to be sharing a failure but thought maybe others might benefit or you could write a blog on the "costs of ownership."

Gail Says:
Thank you for sharing. Others will benefit and will learn just as you did.

 

E Wrote:
I recently discovered my husband and I can be debt free in 5 years, which is a very exciting development for us as we thought we would be paying our student debt until we die. My husband feels that we should consolidate everything and make one payment rather than 5 separate payments. I would rather pay them all separately. Is it even possible to consolidate OSAP loans? Our debt payments are for two student loans, one student line of credit and two credit cards that aren't close to be being maxed out but still carry a monthly balance.

Gail Says:
If consolidating will lower your interest rate then you should, assuming you can get someone to give you the money (which is the first thing you'll have to find out.) You can consolidate your student loans, and you should pay a lot less in interest if you do. Watch the interest rate you're being offered. Don't just assume it will be lower. Know that if you do consolidate, you'll lose the "special benefits" of being in the student loan system (interest deductibility, deferrals, etc.), but if you're determined to get 'em paid off, you can save on interest by consolidating.

 

J Wrote:
I am in need of some help. Both my husband and I have full time jobs and we don't really have much to show for our money. I don't even know where half of it goes at times. We have tried to make budgets (did work for a bit) but then when we needed money we would take it out of another area and then say it's ok we will repay it back later. What would be the first step to creating a budget and knowing how much to put for each variable expense?

Gail Says:
The first step is to figure out where your money has been going. Go through six months’ worth of your spending (every bank statement, credit card statement, or anything else that shows where your money has been going) and put in every penny you’ve spent so you know exactly what you’ve been doing. Only by knowing where you’re money has been going can you make conscious decisions about:

• If you’re satisfied about how you’re spending your money, and

• What you’ll change to make your money work better for you.

You can get directions for doing a spending analysis and a budget in my book Debt-Free Forever. I'll also be putting up a downloadable package called The Gail Way shortly and this will also lead you through the process.

 

P Wrote:
I was wondering about short term savings. I am trying to save for a house for next year, my girl friend has the money to put down but would like to wait for me to save the $10,000 for next year, I have worked out that I can save the amount but is there anything better short term than a regular savings account?

Gail Says:
You want to go with a high-interest savings account from somewhere like ING direct, PC financial or Ally. Check out what they are paying online and then sign up for more return.

 

I have $170000 in RRSPs in 3 different institutions. I will be 60 next June and will retire. Would it be better to hold that amount in one institution only? I don't need the money before I'll be 70 and force to do so.

Gail says:
Consolidating your RRSPs makes sense if you want to make the management of your money more convenient: one statement, one foreign-content limit, one asset allocation model. That being said, if the investments are doing well, and you're not having any trouble keeping track of them, there's no reason to consolidate before you turn your RRSP into a RRIF. At that point I would suggest consolidation so that you don't have to diddle with three different minimum amounts and the like. Of course, if your investments aren't all you'd like them to be, it may make sense to do a consolidation and a revamp of your portfolio at the same time.

 

As a senior who is past age 71 and still having earned income can I put RRSP funds into my wife's RRSP? She will be 69 end of this year. I need to reduce taxes and she needs more in her RRSP in order to get a better rate on a RRIF.

Gail says:
You are entitled to make an RRSP contribution in your wife's name up until the end of the year in which she turns 71 -- so the answer to your question is a definite "yes". The RRSP will compound in her name while you will receive a deduction for having made the contribution. Careful though. A contribution to your wife's spousal RRSP shortly before she matures it to a RRIF could backfire. As long as she intends to withdraw only the minimum amount each year, at least for the first three years, you'll be fine. However, any amount taken from the spousal RRSP above that minimum amount that must be withdrawn under current legislation may be taxed back in your hands. It all depends on how much was contributed in the years preceding the withdrawal. The rule is that any amounts withdrawn that had been contributed in the year of withdrawal or two preceding calendar years would be taxable to you. This rule doesn't apply the minimum amount, so that would be taxed in your wife's hands, no matter what.

 

I'm currently invested in mutual funds and want to get into individual stocks. I've heard of Dividend Reinvestment Plans. How do I get started and will I be able to automatically invest a set amount each month?

Gail says:
Once investors have done the mutual fund thing for a while, they often get itchy and want to wander into the world of individual stocks. So your yearning is quite natural. However, you need to become a lot more educated to be a successful individual stock picker. And you have to invest a whole hell of a lot more time in research and monitoring your portfolio. That said, on to your question.

A dividend reinvestment plan, also referred to as a DRIP, is a system through which companies automatically reinvest the dividends they pay on their stock into additional shares or part-shares. In other words, if you buy 300 XYZ shares, which are currently trading at $1, and they issue a dividend of 10 cents per share, their company will take your $30 in dividends and automatically buy you 30 more shares of XYZ stock. The big upside of a DRIP is that there is no commission charged on the reinvested dividends, so every dollar in dividends goes toward purchasing more shares.

I think you may have confused a dividend reinvestment program with an automatic investment program (AIP). With an AIP, your bank, brokerage house or whoever has your money, establishes a set investment amount based on your instructions. You can tell them to take $50, $100, whatever amount you want, from your account each month and use that money to buy a particular investment. You can do this with most mutual funds. However, stocks (and other individual investments, such as bonds), don't trade like mutual funds do, so an automatic investment program isn't usually applicable.

Many blue chip Canadian companies do offer Optional Cash Purchase (OCP) programs where you can invest a set amount monthly or quarterly. You simply write a cheque to the company or transfer agent. While there are annual purchase limits, these tend to be generous, and so an OCP may be just what you're looking for.

Alternatively, you can sign up with the Canadian Shareowners Association at which will provide you with access to a low cost investment program (it offers access to DRIP shares in very small quantities.)

 

Most investment advisors suggest dollar cost averaging as a excellent means of investing - and it enforces the buy low, sell high philosophy - because by investing the same amount each month, you buy more units when the price is down, fewer when the price is high. Systematic withdrawal plans are also widely promoted. Are these not bad, then, because if you take out the same monthly amount, you would be selling more units when the price is down, and fewer when it is up?
 
Gail says:
If the only point were to buy low and sell high, and vice versa, then you would have a solid point. But while that phrase “buy low, sell high” is the adage most associated with dollar cost averaging, it isn't really the point. The true benefit of DCA is that you average out the cost of your purchases (or sales, in the case of a systematic withdrawal plan) so that you never have to worry about trying to time the market. So, it doesn't matter what the market is doing, if you make regular contributions or withdrawals, your price will even out over the long term.

 

I have noticed that in their financial snapshots for makeovers, participants put a value of $X to their house & contents. In my own assessment of my net worth, should that particular figure include the value of the property plus the value of the house contents (i.e., furniture, appliances, antiques, etc.) or is there another way to estimate that.
 
Gail says:
The value put on a property, is usually the going rate of that property at the time the net worth statement is done. So if you bought a house for $100,000 and it's appreciated 25% during your ownership (which you can usually judge from the value of like homes selling in your neighbourhood, or from a professional appraisal if you want to go that route), then you would list $125,000 as the value of the home on the net worth statement. That's a pretty "hard" asset, in that it is very likely that you will get $125,000 if you sold that property.

Appliances, furniture and other personal possessions, are a whole other story. These are "soft" assets in that it is unlikely that the value placed on them as assets could ever really be realized through their sale. People often over-inflate the value of their personal (soft) asset for sentimental reasons. So most financial advisers smile and accept what you've said they are worth, but immediately discount their value — often to nil — for any financially useful purpose. That's not to say they shouldn't be included on the net worth statement. After all, if you hit the ripe old age of 40 and still don't own the table you eat breakfast at, that too says something about your financial nature.

One type of personal asset that may fall into the "hard" category is the collectable — be it antiques, art or the like. Of course, they have to be "antique" and not just "old", which some people don't quite get.

When it comes to your government pension, the value today would be a part of your assets for net worth purposes, so definitely include them.

 

I want to begin by telling you what an inspiration you are! I wish that one day I can be as financially wise as you! You are such an inspiration to women. Now to my problem…I am 30 years old, recently divorced and have some substantial debt. I am also a very busy career woman and make a 90K + income. I have cut down my spending to almost zero yet I still can't figure out a way to get out of this mess (I can't remember the last time I bought new socks!!). I have tried on my own to come up with a repayment plan following your advice and I still can't figure it out. I was wondering if you deal with clients outside of your show and offer consultations. Please, help me!! I am willing to do anything!!! I have learned my lesson of what debt can do and I just want out of this mess. I want to learn how to be financially stable for the rest of my life and not have to worry. I just don't know what to do anymore or who to turn to for help. I hope that you can find the time to answer my question and please help me. I am willing to do anything!!

Gail Says:
This is not as hard as you think it is, but it does take determination and time. If you are in fact willing "to do anything" go and get a copy of Debt-Free Forever and follow the steps I outline to the letter. I don't have time to take personal clients which is why I created the website and wrote the books. If you can't afford your own copy, hit the library. But this is something you are going to have to figure out for yourself. Com'on chick... you're 30, in a responsible job and starting a new phase of your life... you can do this!