October 2012 Questions & Answers

 

 


K Wrote: I am 29, working full time, part time student, renter who is confused as to where to put my money. My rent is really low and as single person I am not interested in buying a house any time soon. (Property taxes would be just as much as my rent!) I save 10% of my take home pay into a RRSP and also have a car payment, for a used car I bought 2 years ago, with $4000 left on the loan (loan is 6%). I have recently gone on a cash diet and have learned to change some spending habits. Since I have changed my habits I would like to put my extra money to work for me. Should I put more money towards to car loan and pay it off faster? Or should I save more money in RRSPs. I have always been a saver so I have a 6 month reserve if anything was to happen to change my income. I am just not sure what to do with the extra?

Gail Says: Since you've got your emergency fund in place, and you're already saving 10% for retirement, if it were my decision (it is YOUR decision) I would get rid of the car loan at 6%. You're paying that 6% with after-tax dollars so you'd likely have to earn about 8% on your savings to break even, when you take taxes into account. Once the car loan is gone you're going to be pretty flush (no car payment, + the extra money), so start thinking about what your next goals will be once you achieve debt-freedom.

 

C Wrote: I am turning 17 next month, and money, work and moving out is really becoming real to me; and it's scary. I'm not quite sure what I should be doing. As a kid, money was never really discussed in front of me and I got what ever I wanted, and now I am blowing any money I get (pay or gifting) within a couple days. Please I need help! P.S Love the show! :)

Gail Says: You need to make a realistic budget and start tracking your spending. You also have to set up an emergency fund (for when the crap hits the fan) and start saving a little sumthin' sumthin' for the future. It doesn't have to be a lot to start: $50 a month. Just get started. Go to the library and get a copy of Easy Money. That's a good place to start.

 

H Wrote: My daughter is off to university this fall and before we pay the first installment of approximately $7,000, I am wondering what the best plan going forward is on how to spend the money we have available over the course of the next four years? We have approximately $20,000 in RESP, I have about $10,000 in savings and she is getting potentially $8,000 in OSAP this year. We expect her to pay for tuition/books and we will pay the living expenses. We would like her to come out of university with little or no debt. Because we were down to one salary last year I am assuming now that we are back to two she will not get much if anything of a loan in the next few years. The goal is to keep her down to under $10,000 debt when she leaves university. (Huge goal...)

I would really like her to try and save as much of the $8,000 she gets this year and spread it out over the next two or three years and supplement the balance of the following years expenses with a part time job and with some additional savings we can come up with in the next three years.... am I being naive?

Gail Says: Okay, so you have $20K in RESPs, $10K in savings and she has $8K in OSAP. That adds up to $38K. You know that tuition is $7K (which is almost all of her OSAP, so I'm not sure why you think she'll have anything to save) and then there are books and fees, and living costs. Is she going into residence or living at home? Have you worked out a budget for that? My Alex lives with 6 other people in a small (very small) house and her rent is $400/mo. Then there's food, utilities, internet, transportation, the odd item of clothing, and personal grooming stuff (we're not talking manis and pedis here... more like shampoo, toilet paper and deodorant). She gets $600 a month to cover everything other than rent. If your daughter lives at home, that's money you won't have to lay out, but if she's going away from home to school, while she may get by on a little less, don't underestimate the costs. I've resigned myself to the fact that university is an $18K a year cost.

My guideline for student debt is not to graduate with more than your first year's net income in student debt. If your daughter will NET (after taxes) $27,000 a year, that's the most she should have in student debt to get it paid off in a reasonable amount of time AND have a life.

 

D Wrote: I have worked at McDonald's Restaurant since 1983. I put money away for RRSP’s; I bought McDonalds shares, received profit sharing, and bought health insurance. All things to try and make sure my life had no real scares.

However in 2010 I ended up on long term disability. I have had Crohn's since 1981. I thought things would be okay, my salary would be about 50% less but I had paid for the top tier health insurance. Imagine my shock when I received a letter last month that terminated my medical, dental and out of the country insurance. It seems Great West Life and McDonalds had signed a contract that terminated coverage after two years. So now I have no insurance and no one will cover me because of my pre-existing condition. Also since my husband had coverage through me his was also cancelled. Our medications for conditions we have now exceed the amount of my disability.

Do you have any suggestions for what we can do? I watch your shows and have tried to follow your advice but right now I can't see a way out of this hole. Please make this your letter that you pick to give advice. I know that there are other people out there with the same problem.

Gail Says: I'm very sorry you got caught up in this. It is the very nature of corporate benefits that they can change. When companies change providers or negotiate new plans, it is the planholders who are left holding the proverbial bucket. And there's nothing much you can do about it. I wish I had better news for you.

 

S Wrote: My husband has 2 grown children from his first marriage. I never had kids. If I die first, our matrimonial home would go to him. Then, when he dies, the value of the home could go to just his 2 daughters - depending on how he sets up his will when I am gone. Is there any way to get around this and ensure that my side of the family (siblings/parents) inherit part of the home's value?

Gail Wrote: You need to go and see a lawyer that specializes in estate planning to create a will that will protect your interests. There are ways to pass on assets to both families (your and his), but this isn't something that you can do without expert help.

 

E Wrote: I am currently a student at McMaster University studying Environmental Science. I am going to be finishing my fourth and final year in April of 2013 and graduating with zero student debt. My parents have graciously paid for my first degree and expected me to find full time employment during the summer months when I am not at school. After this degree I am more or less going to be financially independent. My parents will give me a little money *if I need it* each month. Also they won a brand new car this past year which they have given to me (but it is not in my name so I do not have to claim it) which they pay the gas for. I do not live an extravagant life. My parents have raised me to be very money conscious and I want to continue to be. Going into my second degree I will be debt free, my parents will be debt free and credit card debt free... every type of debt free. I have had a budget since I was three. If you don't have the money you don't buy it. This is why even school debt TERRIFIES ME.

I want to go to law school and to one day become an Environmental Lawyer. I am trying to make plans financially in order to make my dreams come true. Initially I thought that I would work and save money prior to going to law school, but I have sat down and crunched the numbers and I have realized that in order to live (with no extravagant spending besides twenty dollar allowance a week) that it would take me a very long time before I have enough money saved in order to go to law school.

I want to go to law school in Ontario (where my parents live) and the highest I have seen tuition to be is approximately $25000 per year (could be as low as $7000). Also, I am a very small, skinny little girl, but I eat a very, very large amount of food. I am very healthy and just have a fast metabolism. I spend about $120 a week on food. As I said I have $20 extra a week for spending/gifts etc. Internet we projected to be about $40 (will probably be half this amount) for internet (I will not have cable and my parents have agreed to continue to pay my cell phone bill). Books are projected to be $6000 and traveling to visit my boyfriend and home to my parents will be about $600 a year. Rent also is varying depending on where I go to law school. Worst case scenario (don't with research of apartment prices right now) rent will be $1200 a month (for places like Ottawa and Toronto, currently my rent in Hamilton is $475 all inclusive). All together this comes to a bill of roughly $55000.00 per year.

When I graduate I will have about $7000 left over from my first degree. Every year I can go back to my job with the Ministry of Environment and I will learn 10% more hourly than I did the previous year. Next year I will make about $7000 in the summer and my lunches are paid for some days, so that helps out the cost of groceries. The online OSAP calculator says that they will give me a loan of roughly $12000 and a grant of $8500 per year.

Where would you go to get the extra money? I will be applying to bursaries and scholarships etc and I have read your articles such as "So How Much Debt Can You Afford?" I have looked at the Scotiabank Student Line of Credit and a little bit at the Bank Loans...these make me nervous though because the interest rates start building while you are in school (unlike OSAP). I want to pay back my loans aggressively after I am done school, I will keep living the way I am (same rent, same lifestyle) until they are gone and then the game plan is to save a down payment for a house.

Besides OSAP, where is the next place I go to get money. My parents and I are looking into it. The Scotiabank Student Line of Credit shows to be prime + 3% on the internet. My parents were talking and they may loan me the money for 3% interest only.

Any advice or help would be much appreciated. What is my best plan of action without involving my parents?

Gail Says: There's a big BIG difference between paying $25K a year in tuition and paying $7K. There's also a big difference between paying $1200 a mo for rent and paying $500. You're going to have to narrow down your choices a bit before you move into this. As for things like books, was that really $6000 a year, or did you mean $600? If the former, I think you better find a way to trim that (second hand etc.).

As for where to find the money, borrowing will be your own option if you don't have extra money in the bank. You should aim to graduate with no more than your first year's NET (after tax) income in debt. And then you should aim to have that paid off in three to five years.

A line of credit at prime + 3% is no great deal since the interest clicks on the minute you pull a penny (unlike OSAP which doesn't charge any interest until you finish school). You may have to prove your independence from your parents to qualify for OSAP since they may make too much (I'm guessing) for you to qualify if you are under their care. I'm not sure how old you are, so check into this.

A year of working and skimping would probably set you up really well for getting through school with the least amount of debt. And as long as you don't have a "big bank account" that will disqualify you from OSAP, it would put you in a very good place.

 

L Wrote: I have only one credit card debt now, but it is going down as well. On this credit card of over $11,000.00 at 5.9% I have an accident insurance of $13.45 a month on it. I'm able to pay it off in a little over two years. Should I keep this accident insurance in place or should I cancel it so that I can pay it off sooner? I have to say if it wasn't for you Gail with your show and reading your books I would have never been able to get out of this mess. Thank you for caring about us.

Gail Says: You don't say whether you have disability insurance that you could use to continue making the credit payments. If you do not, then you have to make the decision if you want to pay for the "security" of knowing your payments will be covered, or put your nose to the grindstone and get that puppy gone as fast as possible. I'm not going to make that call for you. It's your decision.

 

L Wrote: I have just discovered my home has major structural damage from rotting wood that will take a lot of money to fix and it has to be fixed whether I stay in the home or sell it. My question is do I borrow money from any source I can or do I cash my RRSP savings to pay the contractor?

I have had many rainy days in my life and have spent the last 15 years working my way back from bankruptcy (my husband and I had a business that turned sour secured on our house) to a position where I own a home (8 years ago I bought it), with a mortgage about 70% of its estimated value before this damage was found, have $60,000 in RRSP savings, a stable job that pays $46000 for a 4 day work week, a small UK pension, and own everything I need in life. I am single, my husband died after 39 years of marriage, I had separated from him in 1999 after 30 years of marriage as I could not deal with the financial chaos we were in any longer. I have "relaunched" the kids who now have happy settled independent lives and we have a great relationship despite dreadful addiction problems in their teens and twenties (they are living clean for several years now).

I am 64 years young, healthy and happy, but this news about the house which damage was discovered because I was doing some renovations (line of credit and 0% limited time credit card) pretty much devastated me and changes the course I was on and the plans that I had. I am over the devastation because it is what it is and has to be dealt with. I have a great contractor who is doing his most economical best for me and I have to pay him.

I am addicted to "Til Debt Do Us Part" wish my husband and I had seen it when we had our struggles. I haven't done everything right by any means but am proud of how much progress I made but am now embarrassed because I was too ambitious and it has come back to bite me.

Borrow more or cash RRSPs? I am more than willing to sell the house once it is fixed, although I love it and am/was very happy there.

Gail Says: I'm sorry to hear about the kick in the teeth. You're a strong woman and I know you will be fine. It will take some patience and some very deep breaths, but you will be okay. With your current income and the situation as it is, I do not think you should cash in your RRSPs for this. You're going to need that money when you finally do retire. I'd use the line for this. Then I'd look for a little extra work (or places you can trim back your budget if possible) to see that line gone before you finally hang up your spurs. Once the house is fixed up, then do a reassessment in terms of whether you should sell or stay at that point. One thing at a time babe, and then deal with the next decision based on the black and white numbers.

 

A Wrote: Regarding not borrowing to contribute to an RRSP, would it not be correct to borrow under certain circumstances? I have read several financial books that suggest exactly this. For example, you have saved $3,000 to contribute, but you are in the 40% tax bracket. You could borrow an additional $1,200 (whether it is loan from a bank or from a Line of Credit) and then use the tax refund you get for the RRSP contribution to repay the loan?

Gail Says: That would indeed work. I don’t say "don't borrow", I say don't borrow IF:
you can't pay the loan off in one year AND
you can't make your current years contribution at the same time.

As long as you can do both of these, it makes perfect sense to grab the deduction now. But if all you're doing is setting yourself on the treadmill of borrowing every year, then you'd be better off skipping a year and using what you would have made in loan payments to proactively contribute for the current year.

 

P Wrote: I am in the process of creating my Spending Analysis Worksheet and I have hit a road block. I have some transactions from either a department store or a pharmacy that (since I have the receipt) I am able to break it apart into the appropriate categories, but I don't know what to do with the tax. For example, I have transaction from Shoppers Drug Mart for $36.49. I purchased gum ($2.99), an iTunes gift card ($25), and two birthday cards, ($3.69, and $3.49 respectively), for a total of $35.17 (add $1.32 in tax) and my total was $36.49. Now, I don't want o list this transaction under the category "Shoppers Drug Mart", I want to put gum under "Groceries" and the iTunes gift card and 2 birthday cards under the "Gifts" category. But what do I do with the tax? Do I just add $2.99 for my gum under groceries, and $32.18 under the Gifts for the gift card and birthday cards, without including the tax that I paid for it? What do I do? How should I proceed?

Gail Says: You would have to assign the tax proportionately m'love. If you're paying 13% tax, take the total you assigned to Shoppers, multiply it by 13% and add it to the $36.49. Add up all the tax you "calculate" and make sure it matches the tax you actually paid. If there's a difference, assign the "difference" to your largest tax cost. (Remember, you don't always pay tax on everything at the same rate.)