November 2012 Questions & Answers

 


P Wrote: My 60 year old mother has somehow managed to get herself into debt. The debt is with a Canadian bank and the interest rate is just absolutely criminal. She lives with my grandmother, 80 years old, and addition to her paycheck she also collects her Canada Pension. Yet in spite of not paying big rent, not having car payments or anything like that, she refuses to get herself out of debt. I try to stay out of it, but my poor grandmother is being driven crazy. Not only are the debt collectors calling 3-5 times a day (I took the bull by the horns and called them, insisting they stop harassing the octogenarian whose name the phone is in) but she's starting to get worried that the nest egg she plans to leave to my mother will be in jeopardy.

It's a horrible conversation to have, "when you die" but we've found ourselves having to go down that road the more calls my mother receives. I'm the executor of granny's estate, and when she passes on; her savings will revert to me and my mother, along with the house.

My intent would be to immediately pay off Mom's debt immediately, but I know her well enough to know that she'll just keep accumulating debt and we'll be back to square one.

So my question would be, taking into account that this would be a joint account, can they go after this money if she gets into a deeper hole? What about the house? Can they go after the house if she doesn't pay? And what if something happens to Mom? I know it's true they can "try* to get me to pay an unsecured loan in someone else's name by being a nuisance, but since everything will be in both our names I wonder if this will change the dynamic.

Gail Says: Your mother should declare bankruptcy now while she has no assets and get the debt discharged. Two positive things will happen (aside from dealing with the debt). 1) She won't be able to get any credit, which will limit her ability to dig a deeper hole. 2) She'll have to learn to live within her means to meet her obligations.

As the executor of your grandmother's estate you have only so much control. Once the assets pass to your mom, she can do with them as she wishes. There should be NO joint accounts and no joint ownership since that leaves you exposed to your mother's bad financial behaviour. Yes, they can go after anything they can get their hands on to collect what is owed.

You are NOT liable for any debt on which you are not signed personally. But your joint assets will be affected.

Your grandmother could leave the house to you outright, with your mother having the right to live there but without ownership so that her irresponsible behaviour cannot affect that asset. That would mean you could not sell the home until your mom kicked the bucket, and as long as you're fine with that, it's a better way of handling things. As for the cold hard cash, no joint account baby. She gets her money and you get yours. If your grandmother is worried about her blowing through it, then she should leave it all to you with the understanding that you'll provide your mom with an allowance equal to her share over her remaining life.

Good luck with a very sticky situation.

 

A Wrote: I am 38, single, no dependants and have no debt, just passed half-way point on my mortgage (now owe $52317), will have saved 6 months of expenses by September, maintain a $1000 emergency fund, and expect to have fully funded my RRSPs within the next 3 years.

I have parents in their early 60s who have a large mortgage ($160,000) they say they cannot afford. The majority of which is a result of mismanaged finances, impulse spending, and loans to my siblings. Their monthly payment is $1000, my dad earns about $2000/month and my mom earns about $800/month. All 3 of my siblings live at home and at least two help with the bills, groceries, and miscellaneous expenses, in addition to lump sum cash payments.

My parents have approached me multiple times to help them out, and more times than I like to admit I have, mostly because of the guilt trips and emotions involved. I don't want to spend the rest of their lifetime bailing them out. Last week my dad was injured and he will be off work for at least a month, which means they won't be able to make their debt payments, because they have no savings.

The last conversation I had with them was two days ago and they basically said they will be living on the streets if I don't help them out. Gail, I feel like I am being taken advantage of. They have never offered me money, or assistance, always telling me to consider my circumstances before taking on debt, ie car payments, mortgage payments, student loans etc. I learned very young that I could only rely on myself and have worked since I was 15 years old, paying for everything myself, except for room and board. I paid their car insurance for the luxury of driving the car one night a week until I bought my own car when I was 19. While I lived with them I was responsible for driving my younger siblings to their activities/work, etc, they never paid for a tank of gas. Some of the items I've paid for include new fence, new furniture, a new dryer, occasional groceries, and bills when asked. I feel like I've done enough, and never been thanked, mostly they believe it was a fair trade off for raising me.

I suggested they sell their home to me at fair market value, and in turn rent it back from me for the cost of the mortgage. They are reluctant to accept this offer, because my dad doesn't want me to own his house. I will not give them cash, co-sign on their mortgage, or assume the remaining balance, which are their preferred solutions. We appear to be at a stand-still as I don't want to completely jeopardize my financial future, as I'm not even sure if they would make rent payments on time. What happens if they blow through the cash from the sale and say they can't make rent? What should I do?

Gail Says: Under NO circumstances should you get into a situation where you are counting on your parents to pay the rent so you can pay the mortgage. That's financial suicide. If they can't do it for themselves, they won't be able to do it for you! Keep yourself out of the mess that has been created. With sibs at home helping out, your parents should be able to afford their home. In all likelihood, they could not rent any more than a basement apartment for what they are paying on that mortgage. Yes, there are other costs like utilities, property taxes, insurance and the like, but if they get serious about their money they can manage. This should not fall to you to bail them out.

Your father has already indicated he doesn't want you to own his home. Great. He's right. Tell him so. Also say that you have a great deal of faith in your parents' abilities to see themselves through this tight spot and get better at their planning. Every member of their household should be contributing. And you need to take care of yourself. That is not "selfish" it is "smart".

 

C Wrote: First we would like to say your advice and experience has given Michelle and me a vision about being fiscally responsible. Michelle and I have been married for 11 years; we have 2 children Liam 9 and Paxton 6. We consider ourselves middle class (around 100k per/an) and fiscally responsible up to the point when it comes to savings...We have none. What we find is happening is our children’s sports activities eats our potential savings! Liam’s figure skating is a financial burden about $5000 yr. It is the only sport he loves to do and he is good at it. Paxton is a dancer and swimmer, thankfully no where near the expense that figure skating levies on us. We could save a tremendous amount of money if Liam did not figure skate, but we cannot take that away from him...what do we do?

Gail Says: You're using Liam's figure skating as your excuse not to save. While the expense is a big one, it certainly should not be a barrier based on your income. You need to make a budget that includes the children's activities on its own line. That budget should also include pre-determined savings amounts. Never mind the "We'll save what's less" approach to building a future fund. It doesn't work. It doesn't have to be a ton to start, but it must be a conscious decision. Start with a spending analysis... if you skip this step your budget won't work. Build the budget based on the results. Then decide where you're going to trim back to make the budget work. If you guys are eating out lots'nlots because you're always schlepping one child or another to an activity, that can be fixed with some planning. You can use the process in Debt-Free Forever, by downloading The Gail Way from my website, or you can use the Interactive Budget under resources on my site, which is completely free.

You guys sound like you have a great life. A little tweaking and you won't have to worry about the future because you'll be doing something about it.

 

T Wrote: Here's my predicament: Brief Background - I'm 31, married for 7 years and have 3 beautiful daughters. I was an officer in the military and realized it wasn't for me so I went back to school and completed an MBA and an accounting designation. I now have a great job that I love with a great income. My problem is that I now must pay for the many mistakes I have made in my past. I have 2 large debts totaling just under $100,000. $55,000 was used to go back to school and I feel that was a great decision as I make significantly more now and am happy in my career. $45,000 was used to buy a piece of land to build a house (not necessary the best idea in hind sight). No other debts except mortgage.

Question: What I would like to know is that my goal is to have the debt gone in 3 years but I can't make the budget balance if I attempt to pay it off over 3 years. I would need to pay it off over 5 years for it all to work out. The company I work for offers a RRSP program where I can contribute 6% of my income and they will contribute 3% of my income (I have been doing that). I have accumulated $45,000 in RRSP from my life in the military (locked-in) and my new job. Is it a dumb idea to stop my contributions to the RRSP for a few years to increase my cash flow to pay down the debt faster (over the 3 years)? I would like to retire at age 60 so I have 29 years to contribute.

Gail Says: Since a large part of your debt is student debt the three year rule doesn't necessarily apply. I use the three year rule for consumer debt. You should NOT stop the RRSP contributions. The matching is a gift. Amortize your student debt over 5 years. In terms of the land debt, what are you planning to do with the land? If you're just holding on to it for no reason now, sell the sucker. If you still have plans to use it, amortize that debt over 5-7 years (since it'll form the basis for your home).

 

J Wrote: Thanks for all your spreadsheets and I love your shows. They have changed my life and I am proud to say that I have reduced my debt by over $20 000 in one year alone.

I have a considerable amount of debt that I am trying to pay off. I put a budget in place and have been sticking to it for almost a year now. A few months ago, I finally paid off the car loan and added an extra $400/month to my disposal income.

My question is what should I do with the $400/month?

So far, I have been putting it in an ING savings account for maintenance and repairs. I own a house and I know that I will need a new roof, air conditioner and water tank in the next 2-3 years or sooner. I am also using the maintenance account for car maintenance and I will need to purchase 4 new winter tires this fall. The account isn't growing too fast since every two or three months I need to use some money for maintenance costs.

I keep debating whether or not I should be just putting the $400/month onto my debt payment and when a maintenance issue arises, then use my line of credit to pay for it. I think this makes more financial sense but in the back of my mind, I keep thinking that I won't break my reliance on my Line of credit if I don't start preparing for future maintenance costs.

So in other words, my question is whether or not I should be saving for future expenses or just be focusing on my debt reduction?

Gail Says: You have very good instincts. While it's tempting to go whole hog at the debt, you're right about that not creating the safety net you need to break your reliance on credit. Those are "planned spending" expenses and have a place in your budget. Without accumulating the money you know you're going to need to spend -- without a plan -- you'll just end up back in debt and suffer debt fatigue.

 

Y Wrote: I am finally debt free and have savings!! I have been working on my credit bureau score and managed to get it up to 852 :)

My question: I have a credit card that I no longer use. I have had it for 2 years and it has been at zero balance for at least 6 months. Can I cancel it without it affecting my credit bureau score? I have one other credit card which I use and pay the balance in full every month.

My husband and I are applying for a mortgage on an investment property overseas and they are calculating this unused card as part of my debt service ratio.

Gail Says: When you cancel the card in all likelihood your credit score will take a short-term hit. It should be back to normal within a couple of months. If you are mortgage hunting now, I'd make a plan with the lender to approve you based on your fabulous score now, and then cancel the card once you've got an interest rate guarantee in hand.

 

J Wrote: I've been following your advice for the last few years, and we have paid off all our consumer debt and we've started to save more and pay down our mortgage more aggressively. We've been making extra money through our home daycare, hosting international students in our home and selling our unneeded things.

I am on maternity leave from my job for the next 12 months. And, I have been told that I will be laid off when I return to work.

I am the sole wage earner in my family. I am looking for a new job now, while also thinking about how to make the money I am making now last. Security is important to us, since we have four children under the age of 8.

Before my leave ends, I could pay off our home mortgage of $40,000 and sock away another $13,000 - which would last us about 6 months (we need about $2000 per month, excluding our mortgage payment). We have $36K in other savings, and I will get a severance package as well, which should cover our household costs for about 3 years.

Alternatively, we could renew the mortgage and have $58,000 in savings, which would add pot of savings but increase the monthly outflow by our mortgage payment ($600 per month).

I am struggling with the desire to be fully debt-free so that we can start our new life with less fixed budget expenses with the option of amassing bountiful savings that could support our family for longer.

The house-secured line of credit could be a way of borrowing back funds, if we find that we need it. That is such a distasteful option; it would encourage us to earn sufficient incomes to keep food on the table without going into the red.

Do you think we should pay off the mortgage? Or postpone the mortgage burning party in lieu of building bigger savings?

Gail Says: If you were living hand-to-mouth I would tell you to sock the money away in savings. If you're getting a severance, which combined with your existing savings will cover your costs for three years, you're in fabulous shape. If it were my decision to make I'd pay off the mortgage and get rid of that cost.

 

J Wrote: Our son is off to college in the fall and we are wondering the best way to dispense his RESP money to him. We have saved a considerable amount so he won't be getting it in one lump sum. We want him to be responsible for his own spending now that he is about to turn 18 and go to college. He'll be living at home for now so we'll still keep a roof over his head and feed him. However, we'd like him to assume responsibility for all of his other living expenses. My question is how do we give him his RESP money? Should we give him a lump sum from time to time e.g. $5000 a term? Should we give him a monthly withdrawal? He's got some savings, scholarship money and is planning to work this summer so the RESP is not his only source of income. Any advice you have to give on this point would be greatly appreciated. I've been watching Til Deb to Us Part for years. I love your show, books and general philosophy. Like you, I cannot believe how little some people know about money and the mess they get themselves into by not learning more before they get into trouble. I want to get my son off to the right start while he is still at home and I can help him learn the basics. Many thanks from a great fan.

Gail Says: I have resources on my website specifically for students and you should point him in this direction. He will need a lump sum to pay his tuition (these usually have to be paid up front for the whole year to avoid interest costs), buy books, a computer, and whatever else he may need for school. As for covering his own costs, he should sit and make a budget (using my student worksheets) and then together you can discuss how much he will need to spend each month. Once you agree on a reasonable monthly amount -- since you're covering food and shelter, it may be around $200-400/month, depending on his actually costs -- then you'll take a withdrawal from the RESP to cover the months he is in school and put that money in a savings account, transferring the amount he needs monthly to his chequing account. You should be working to eventually handing over the full savings account that he then uses to transfer money for himself each month.