### January 2012 Questions & Answers

S Wrote:
Thanks for all the resources on your website and blog. Always a great read :) I am currently working at a job where I make a good income and so I am in higher tax bracket. I am looking at getting a second job, partly for extra income to pay down debt, partly as a possible stepping stone to changing jobs in the future. My question is, that this would be a part-time job and most likely not far above minimum wage. The taxes deducted from the second job will (I am guessing) not be enough, because at the end of the year the incomes will be combined, I will still be in the higher tax bracket and the 2nd job will have been taxed in the lower bracket. Is there a formula as to how much I should put aside so I can plan for the extra tax I will have to pay? Is there a time where it isn't worth having the second income (i.e. minimum wage job in the top tax bracket) considering other expenses req'd to maintain that second job like gas, childcare, etc? Thanks for your input!

Gail Says:
The only way it would never be worth it is if you were being taxed at 100%! As for how much you should set aside from your income, figure out how much they’re deducting and subtract that from your actual marginal tax rate. Set aside the difference in a savings account for when the taxes are due. To figure out how much tax you’ll likely have to pay go here: http://lsminsurance.ca/calculators/canada/income-tax.

P.K. wrote:
I wanted to know how to calculate fairly the share of profit from the sale of a home relative to each partner’s initial investment. In our case, one has invested 25k\$ and the other 5k\$, we have equally paid 50-50 the mortgage thereafter and have had the house for 4 years now. We have roughly paid down the principal by 30k\$ on an initial mortgage of 275k\$. Thank you, P.K.

Gail says:
Take the equity in the home, subtract the initial investments and divide the remainder by 2.  Let's say Bob put in \$10,000, Penny put in \$3,000, and there was \$25, 0000 in equity. We'd give Bob back his \$10,000 and give Penny back her \$3,000 leaving \$12,000, which we would divide in two and split equally.

C wrote:
Today I had a financial advisor come to my house (brought in by 2 friends who use him) and talked about our RRSPs. Right now between my husband and I were putting almost \$500 a month towards it. He showed us how we could put less in and make more money when we retire. He showed us how it worked with an education plan (that we will need too) by taking this \$10,000 loan out and only pay 63\$ per month, which would take up to 20 years to pay off. But if we keep up with it for 25 years it would go up to \$360,000 (he said it doubles every 5 years) and if we don't use it for education we would get the whole 100% of all that money back. Is this to good to be true? Or does this really make sense? Both my husband and I are 22 and still have many years before we would need this money for retirement.

Gail says:
Since I don't have the details in front of me, I can't tell you if it's a valid alternative or not, although it does smell a little fishy to me. But I will give you some things to think about:

1. What does an education plan have to do with retirement savings?
2. Why does the plan necessitate borrowing? Why is paying interest on a loan ever a good idea?
3. Does it make sense that you can save less and have more? Really?
4. In order for any investment to double in five years, using the "rule of 72" you'd have to earn better than 14% in return... which IS TOO GOOD TO BE TRUE in our current economic environment unless you’re taking some big risks.

D wrote:
My husband (age 58) and I (age 56) recently took early retirement and we are currently both receiving an employment pension. We have some money in RRSPs and we are wondering if we should start taking some of that money out while our income is at its lowest before we become eligible for Canada Pension. Thank you.

Gail says:
Withdrawing the money from the RRSP while your income is lower and you'll pay less tax makes sense, particularly if you then use that money to save in a TFSA where it can continue to grow on a tax deferred basis.

Kevin wrote:
I have accumulated a large amount of unsecured debt and am considering entering a Debt Management Program to conquer this problem. I have tried to get a consolidation loan from banks, but I do not qualify. I have made the necessary lifestyle changes to bring my budget to a sustainable level but I am not getting anywhere with the high interest rates I am incurring. I feel that my only solution to become debt free within 3 years is to enter into a Debt Management Program. What are your thoughts on these programs? What are the pros and cons? Are there any other options? Thanks

Gail says:
Very often Debt Management is an opportunity to make money disguised as a public service. Debt counsellors arrange for a consolidation of debt with their hefty fee built in. Or worse, they completely ruin your credit history by suggesting you make no payments for up to six months so they have some leverage with lenders to negotiate rates and balances down. If they don’t succeed, they won’t charge you. You, however, will be left with a credit history that is in tatters.

If you already have a crappy credit history, debt settlement might work for you. But you can do this yourself if you have the will and determination. You have to have some money to make the "deal" you're planning to offer, and the lender has to be "motivated" to deal with you. In this case -- assuming your credit history is already a train-wreck -- you'd stop making credit payments piling up the money in a savings account to satisfy whatever deals you strike. Then you'd call each of your creditors and negotiate hard to get them to accept 20% - 50% of the original amount you owe (no interest) if you pay them in a lump sum. Bankruptcy will be your next step, in which case they'd get less. As each creditor agrees, you draw them a cheque. But make sure that you not only get their agreement in writing BEFORE you send them money, but that they agree to provide you with a discharge letter saying you're all paid up. Follow up and get that discharge letter so this doesn’t come back to haunt you.

A wrote:
Hello Gail, My husband and I are tidying up our budget and have been successful so far. Our credit scores both fall slightly below the average Canadian’s score. We pay our bills on time and do have a tiny amount of money in savings.  What can I do about our 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.

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!

Daryl wrote:
how do I get through to my wife who likes to consistently spend our money on needless items such as hundreds of pairs of needless shoes, purses, clothes, or just junk?

I am finding myself in anger and wanting out of our marriage due to her spending habits. She tells me she spends money when she is feeling down or when she thinks she needs to fill a void in her life...she currently holds a couple credit cards but can’t pay the monthly minimum and expects me to pay them for her as her ei or parental leave she blows on smokes or clothing for the baby first.  I am feeling that even after a year she blew her line of credit she hasn’t even tried to pay it down as the minimum principal interest is taken out monthly...

I need help as I feel I am struggling more than I should be to pay down debts... this evening she showed me a new credit card that she had applied for with another credit of 5000\$...

We have no funds for a rainy day or emergency... I make pretty good money myself as I work in construction, but I have been off due to a rotator cuff injury which I had surgery in Jan and now we are struggling with a lot less funds every month and I can’t imagine just how much were paying in interest to the credit card thieves...

Gail says:
If it were me, I'd implement a His, Hers, Ours approach to managing the money. First you determine what the joint costs of living together are: housing, food, utilities... anything you share. Then you open up a joint account and you each contribute your share to cover these costs. You'd do this proportionate to your income. So if you make twice as much as she does, you'd pay twice as much into the joint account. Everything else gets handled individually. You do your own saving. You do your own emergency fund. You do your own shopping. And if you get into trouble, you dig yourself out.

Make sure you're not signed on any joint credit. And recognize that your home, if you own, may be at risk since her bad financial behaviour will affect joint assets.

It is never easy dealing with a partner who does not share your financial values. Ultimately this may be your undoing as a couple. You won't be the first or the last. If the relationship is important to both of you, you'll find a way. If not, well...

Derek wrote:
I have read your articles on giving kids one dollar per year of age per week, and the 3 jars, one for saving, one for mad money, and one for regular expenses. What is the difference between mad money and regular expenses and how do you define what are the savings for? Does it include things like a new bike or video game system etc.

Gail says:
Mad money is money you can spend on anything you want -- candy, comic books, whatever you fancy.
The second jar is called "Planned Spending" and it's for things you need to accumulate money to buy. For example, if you wanted to buy a new video game, it might take four or five weeks of allowance (or more) to accumulate the money you would need. You’d stick accumulate that money in the Planned Spending jar.

Money in the “Saving” doesn't get spent (well, maybe when it comes time to go to university). Buying a bike would be planned spending. Saving is what you do to form the habit so that later, when you go to work, you automatically put away the money you need for the future (we're talking retirement here.) Don’t position it as "retirement savings" just as "savings"... and you'll explain it as "what you have to do so you have some money when you don't have a job...for whatever reason."

Some people also include a fourth jar for “sharing”, which is giving to others who are less fortunate. My kids would put 5% of their allowance in their “sharing” jar.

F wrote:
I am debt free, except for the mortgage. My mother has a number of credit card debts. She is 76 and is in good health. We co-own the house, with a survivorship clause, so that if she dies I automatically become full owner. If she dies, and her estate cannot pay off the debts, can the lenders make me sell the house or put a second mortgage on it, to get the money?

Gail says:
Someone else’s debts cannot become your debts unless you are in some way signed on those debts. So if you co-signed or are a co-applicant on a credit card, line of credit or loan, you’ll be on the hook. Or if the property being passed to you was used as collateral for a loan, you’d inherit the asset and the debt that goes with it. But if the debt is solely your mother’s, no one can come after you for those debts. Creditors can make a claim against the assets of her estate, but if the assets of the estate are insufficient to pay those debts, then the creditors can't try to collect the debt from you. Since the home has a right of survivorship, it will pass directly to you and won’t form part of your mom’s estate. (Ditto life insurance where a beneficiary has been named on the policy.) Any other assets that she may have that would be part of her estate would, however, be open to a claim from a creditor.

D wrote:
My Mother & Father are 84 & 83 years old this year. My mother has developed dementia. Mother is in that grey zone where she should not be responsible for their finances, but not "far gone" enough yet to give up the responsibility unknowingly and she won't admit she has a problem and won't relinquish control. Basically she won't trust anyone else including (or especially?) my Dad to take over control. I've met with the local Alzheimer’s Society and they have offered to help but meeting with people she doesn't know for an assessment or other, would make her furious. Her Doctor prescribed medication but she found a reason to not take it (a rash) and now "hates" him for suggesting she has the disease. Do you have any suggestions that won't split the family apart?

Gail says:
If this were my family situation I would talk to both my parents about the need to have both medical and financial powers of attorney in place because that’s the right thing to do. If they are both doing it, she may not feel she is being singled out. Once those had been executed, and you have to be very careful about this because of your mother’s current condition so get advice from an estates specialist — specifically a lawyer — you could then use the power of attorney to move control of the assets to whomever had been appointed. Because of your mother’s pre-existing condition, it is very important that you get sound legal advice on this. Every I must be dotted and every T crossed. This is a slippery slope and you want to make sure everyone is on board before you start up this mountain.

T wrote:
Watch your show all the time, fantastic someone actually cares to help others out with financial trouble.   My question is, we really don't have any credit card debt, but we just bought a new house and our mortgage is \$201,000 and we have a car loan that is \$300 a month and into year 1 of a 72 month loan. After all said and done at the end of the month we will have some money left over, what would be better to pay off/down first, our rate for the house over the next 5 years is 3.75% and the car is 2.9%?

Gail says:
The house is an appreciating assets, meaning the value will go up over time. The car, on the other hand, is a depreciating asset, so you should focus on getting rid of that loan first.

M Wrote:
I watch your show and not sure where to start. I am divorced, have been on welfare and in a shelter. I have just finished a personal support course (caregiver) and have my first job. Accepting this job was a happy time and at the same time frightening. The agency I work for said she will pay me directly so it means she is not taking out any deductions. In her words I am a sub-contractor (self-employed) and I will need to keep track of all money spent for income tax purposes. Apparently I can deduct one third of my income. I am not sure what my income is because I have not received my first cheque. I should be getting paid January 6, 2012. I would really appreciate help on how I can organize all this and move forward. Currently I don't have credit cards, my rent is \$400.00 and O.S.A.P is \$145.00, cell phone is about \$60.00.

Gail Says:
Set up a savings account and once you've got your first pay create an auto deduct from your Regular account to the Savings account for your taxes. Do the auto deduct from each pay if you can.

K Wrote:
On your new show - TDDUP Baby Edition - I thought I heard you say that you can ask for your income tax to be reduced off each pay cheque to increase your income each month (rather then getting a lump sum at the end of the year). Is this true? Did I hear that right? And if so, how do you go about doing that?

Gail Says:
Form T1213 let’s you request permission from the Tax Man to have your employer reduce the amount of income tax taken off of your paycheque every month. If you can demonstrate that you’re eligible for certain recurring deductions that will reduce your tax bill at the end of the year – you can trade in your tax refund for more take-home pay. Do you make monthly RRSP contributions by way of pre-authorized withdrawal? You’re eligible. How about child-care expenses? If you’re tithing monthly you can do it for your charitable donations. You’ll have to fill out the form and send it to the Tax Man each year (Oct/Nov is the perfect time). Once you’re approved, the Tax Man will provide instructions by letter to you, which you then give to your employer, who will adjust your pay for the remainder of the year.