May 2012 Questions & Answers

 


T Wrote:
I am 30 years old. I own my own home. I currently have a roommate who will not be with me much longer. For sanity's sake, I do not want to get another roommate. I have not been by myself in almost ten years. I currently have a job that pays just over minimum wage with bonuses, and earn a little cash on the side helping someone who pays well, but short hours. By your build a budget site, I'm going to be in the hole about $100 a month. The good news is that two of my utilities are not billed monthly. It's a silly question, but is there hope for me between mortgage, loan, credit card and bills? I have no fun stuff budgeted cause frankly, I'm a hermit and don't go out.

Gail Says:
You haven't told me how much you owe on your mortgage, loans CC and what your bills are, or how much you actually make, so how would I know? The fact that two of your bills are not billed monthly is moot... your budget should reflect the amount you set aside each month for when the bill comes in. If you built up credit card debt while you had a roommate, how do you expect you'll manage without one? This is a question I can't answer for you, you must answer it for yourself. Have you figured your debt repayment into a budget? Have you looked at how you have been spending? Go and borrow a copy of Debt-Free Forever from the library and follow the steps.

 

H Wrote:
I'm in love with your show! It has helped to take the taboo away from talking about debt, cause everyone has some. Although, I could be a good candidate for your show, I am much too shy and ashamed so I'm grateful that you entertain emails.

Here is my scenario/dilemma:

I'm a single 36 yr old female that had a handle on my finances but broke my ankle and was off work for 5 months and returned back full-time after a year. During that time, I racked up bills and am trying to play catch up. My annual income is $57K and my total debts are about 19K, including credit cards, student loans and car loan. I do manage to make my monthly payments plus a little extra and take advantage of low introductory rates, but I feel like I'm going no where fast!

I do have 24K in RRPS and am considering taking 10k out to pay towards my debt to attack the interest faster and then make monthly RRPS contributions because my RRPS interest earned is really low anyways (2.0%). One TD Bank Rep advised to apply for a consol loan and keep my RRPSs but the interest over 3 years is ridiculous (something like 6K)! My other TD Rep, who I know, likes my plan to withdraw and pay back my RRSP because I'm still young enough and have time to contribute). I figure that I am "borrowing from my RRSP" to pay the debts to mitigate some of the interest charges from the debt. Yes, I realize that I will have to pay the withholding tax, but I will also make contributions so earn a tax receipt for this year. My plan is to buy a property in the next 2 yrs, so I'd like to attack my debt.

What route would you recommend? I'm feeling paralyzed in making a decision because I worked hard to save that RRPS money and want to make sure I don't dig a further hole. Is this a rational plan?

Gail Says:
Here’s the rub. You won’t just pay withholding tax on those RRSP withdrawals; you’ll have to pay tax on them at your marginal tax rate. You say you’re earning $57K a year, which means your marginal tax rate is somewhere between 29% and 35% depending on where you live. If you live in Ontario it is 31.15%, which means that for every $100 you withdraw, you will owe $31.15 in tax. If you take $10K out of your RRSP, they will withhold $2,000 in tax, but you will actually owe more: $1,115 more, for a total of $3,115 in tax that must be paid on your withdrawal. If you are then going to turn around and make RRSP contributions, you’ll mitigate some of this tax owed.

If it were my choice to make — and it is YOUR choice to make — I would leave the RRSP alone and ramp up the debt repayment using part of the money I’d be contributing this year to the RRSP and all of the money I could find by cutting back to the bone on everything else. You should not totally give up your savings... That’s a bad habit to start. And while you may think you’re a pretty young 36 year old, $24K in RRSP savings isn’t a huge amount of money for retirement. You’ve got to get your crap together, get that debt paid off and ramp up those savings.

 

D Wrote:
I wonder if you could provide further comment on the deductibility of moving expenses, when one is moving more than 40 km closer to work. There was a recent court ruling "Wunderlich vs The Queen" that allows for people to deduct expenses even though they are not working at a "new" location, just that they are 40 km closer to their current work location. I wonder if any of your readers have been successful in getting this deduction, as it appears the judge has decided the wording "new" in work location is no longer a factor.

Gail Says:
It appears you are absolutely correct. The argument made was that the location as defined in the Tax Act only had to satisfy the condition of being an "eligible location", and "simply a location in Canada". There was no requirement for this to be a "new" location so Mr. Wunderlich got his deduction. As a result of this ruling EVERYONE can now deduct moving expenses if you moved to a new residence more than 40 kilometers closer to your workplace, even if you didn’t get a new job. Of course, it’s left to be seen if the tax man tries to close the loophole. I doubt he’ll bother.

 

L Wrote:
My husband and I are newlyweds and we are looking to buy a house. We are currently living in a loft style condominium. How can we calculate how much we should be spending on a home? The last thing we want is to be house poor.

Gail Says:
Please don’t leap into home ownership without a clue about the financial responsibility you’re undertaking. Home ownership is NOTHING like renting, so don’t think you can afford a home because the mortgage payment is almost like rent. You’ll have utility costs, taxes, insurance and the cost everyone likes to ignore: maintenance

Once you’ve got a sense of how much the new place is going to cost, it’s time to practice living on a new budget. If you figure it’ll cost you $2,150 a month to carry your new home, which means you actually have to come up with $1,850 a month every single month. So live like you’re spending that money while you’re still renting. Take that $2,150 a month, less whatever you may be paying to keep a roof over your head right now, and stick it in a savings account.

Don’t forget to calculate your closing costs. There are legal fees and expenses, a home inspection fee (don’t skimp), adjustment costs for things like pre-paid property taxes, an appraisal fee, land transfer tax, title insurance, an interest adjustment, a property survey (maybe), water quality inspection if you’re living in a rural area, and hook-up fees for setting up your new services like a phone line. And don’t forget taxes.

Also budget for what you will need or want to buy for your new home. From window coverings to appliances, from a new bed to new broadloom, there are always ways to spend money on a home. If you have grass, you’ll need a lawn-mower. If you buy a house with a pool, you’ll have to calculate the on-going costs to open maintain and close the pool each year. If you have a driveway, you’ll need a snow blower or a shovel and a body with a strong back to do the shoveling for you.

 

M Wrote:
I need your honest opinion about this. My sis-in-law spoke with my husband about the idea of getting a brand new car. I was not aware about it until hubby told me. She filed for bankruptcy so she can't get a car unless my husband would sign on her behalf. Upon learning this, I immediately told my husband that it was not a good idea. I know that if she default payment, he is responsible for the debt. Hubby called his sister to tell her that he changed his mind. Now, my SIL is furious. She thought we are selfish for not helping her. Did I make the right move of stepping in between by not allowing my husband to co-sign? We have 2 kids, mortgage and a car loan.

Gail Says:
You were absolutely right. If she had to file for bankruptcy, she is not credit worthy, and you should NOT be propping her up. She needs to grow up and figure out her own shit, not bring it and dump it on your doorstep. Stick to your guns!

 

L Wrote:
My Aunt let me sell her sons train collection for the family to take a cruise. How do you think we should split the money amongst 28 people, equally or by each person’s fee? Some are bringing small children. I feel the money should just be given to each person equally because she loves us all the same. Help!

Gail Says:
Why don't you ask your aunt how she wants to split the money? On the one hand, equally would mean everyone would get the same amount, but that might mean some people still can't go on the family cruise because the people with children might not be able to afford it. If the family trip is the point of selling the train collection, then paying for each person's fee would make more sense. On the other hand, if it is just to divide the money fairly among family, and not everyone would go on the trip anyway, then equally makes sense. Your aunt should decide if she's just sharing the money, or actually sponsoring the trip. If it's the latter, then pay for each fee.

 

K Wrote: We just recently purchased a house and our bank advisor advised us to get mortgage insurance so that in case of any worse case scenario, the mortgage would be paid off completely. I realized that our payments are double our life insurance payments each month! Wouldn't it have been better to increase our life insurance rather than the mortgage insurance that covers only the house? She said that there would be possibly penalties with the life insurance with regards to the house, but I figure that if we had a substantial emergency fund, then we could ride out any difficulties. Plus we also have critical illness on top of that. Are we over insured?

Gail Says:
You should increase your personal life insurance to cover the mortgage and get rid of the lender mortgage insurance. It is the most expensive way to buy insurance and it is single-purpose. While your mortgage balance goes down, the premium on the insurance does not. At least with private life insurance your family can decide what to use the money for. Your instincts are right. Don't let them scare you into a bad decision.

 

L Wrote:
I survive the first wave of job cuts, but this has really highlighted how unsecured my job is. With budget cuts, I know I'm not safe and the original assurance that my contract would be renewed for the next couple of years may go away under the "dependent on funding" clause. It took me two years to find this job and, without specialized and a sudden spike in the unemployment rate in my city, I do not have confidence that I will find a job with any expediency. In fact, members of my (extended) family are struggling to find employment here.

I have been paying twice the required payments on my student loans for the past year; the plan had been to pay them off in 4 years instead of the 10 years offered, but now I regret paying them so much money when I put only 10% in my emergency fund, ditto retirement fund. However, in the long term, it gets me closer to my goals and saves thousands in interest. I wonder, is it prudent to have such an aggressive plan with so much uncertainty in the future? On the same token, when does it feel safe? I haven't felt "safe" since I was a kid in high school. How do I create the prudent safe plan for the short term while still making long-term gains?

Gail Says:
Don't panic. Life is uncertain, which is why everyone needs an emergency fund. It's great that you've been paying down your student loans at a wicked clip. You're right about the interest savings. You don't say how far you are from your emergency goal. Since your feeling of not being safe is a big deal for you right now, why don't you take the amount you'll need for an emergency fund (6 months worth of essential expenses) and set that as your primary goal. Subtract what you've already saved, and divide the rest by how long you think you may have until your contract comes up for renewal. That'll tell you how much you'll have to save to have that six month pool of money. Having achieved that, you can resume your debt-free priority by ramping back up your student debt repayment amount. As for retirement savings, if you're in your 20's and saving 10%, you're doing fine.