February 2013 Questions & Answers

 


D Wrote: I have about $4500 in consumer debt. My fiancé and I are getting married next summer and we are expecting to spend max $25000 on the wedding. I have been trying to perfect a plan to save the amount needed for the wedding... but...in order to make it work... I have been thinking about redeeming my RRSP mutual fund (that’s probably not the technical term! haha) and my other RRSP which totals $4700 to pay off my debt. Now...I can see that I’m just looking for a quick fix b/c not only am I stressing about the wedding, I’m stressed about how I have paid off my credit cards in the past and then "magically" haha (I know its not magic!) they have a balance again and its increasing! I would like to use my RRSPs to pay them off and just put the cards away for good! Is this a wise decision considering the taxes I will have to pay? I will also have to pay the money back into my RRSP's within the next year correct? I’m concerned about that as well because it will really be no different then paying down my debt within the next year on top of saving for the wedding...ok, now I’m just going in circles! haha Help! :)

Gail Says: I swear I just want to reach out and give you a slap. You're going to come up with $25K for a wedding, but you don't have the good sense to pay off your debt from your own resources? So you're saying a party is more important than being debt free? Don't even think of whining back at me. This is the kind of question that makes me see red. You're looking for an easy way out, so you should do exactly as you plan because I doubt anything I say will actually make a difference. Just know:

1) you will pay tax on your RRSP withdrawals,
2) you can't "put the money back"... once you make a withdrawal the contribution room is gone
3) your priorities are totally screwed up.

I'm not sure how old you are, how much you make, where you live, or what your goals and dreams are. I do know you sound like a teenager with an itch to party and not even the common sense God gave a goose.

 

C Wrote: Aloha Gail. Please let me start by saying I LOVE YOUR SHOW!!! My husband and I are about to become empty nesters. We are going from a household of 6 down to 2 (smiles). We do not have an emergency fund and have 3 credit cards totaling $15,000. I am expecting our living cost to drop by at least $300 a month if not more. Is it best to use that money to start an emergency fund or use it to increase our monthly payments to pay down our debt faster than start our emergency fund?

Also, what is an RRSP? I have seen this mentioned on your blog. Mahalo from Hawaii.

Gail Says: Find a split that let's you do both and helps you get to where you want to be next. For example, you might use 1/3 to build your emergency fund and the other 2/3 to pay down debt. An RRSP is the Canadian version of your IRA account.

 

C Wrote: I was renewing my car insurance the other day and noticed that my insurance agent has branched out into the mortgage business, and is offering mortgages with interest rates at 3.29% for a 5 year fixed vs the posted bank rate of 5.19%. I am going to be looking to buy a house soon, and although I have done my homework and know what I can afford and whatnot, I had always assumed that I would go through a traditional bank for the mortgage, but now that I see that the interest rates can be so much lower elsewhere, it has me thinking....are these places reputable? How can they offer rates that are so much lower? Am I increasing my risk by not going with a bank?

Gail Says: Mortgage brokers can negotiate lower rates because they buy in bulk... not just your mortgage, but all the mortgages they settle with a lender. Very often they get the same mortgage you would have gotten but at a better deal. If the lender is "private" -- not a traditional mortgage company like a bank -- make sure you read the mortgage document carefully to make sure there are no traps or tricks. You want a mortgage that a) won't change the rate on you, b) give you the same prepayment options (if you plan to prepay) and c) let's you move your mortgage with you if you change homes, to name some of the things you should look for. If you're still unsure, take your 3.29% offer into your bank and tell 'em to match it if they want the biz.

 

K Wrote: I recently came into some money and am considering purchasing an annuity. I have no debt (mortgage, car, credit card or otherwise) and have other cash savings, both registered and non-registered. The reason I am considering an annuity is that I will have no company pension to rely on down the road (CPP and OAS only) and am thinking that an annuity would be an appropriate allocation in my portfolio to fill that gap as a safety measure to provide me with a set monthly payment. I know that there are different types of annuities and depending on my needs, the type of annuity purchased makes a difference. My question is more general - with interest rates being so low, is now an appropriate time to purchase any kind of annuity? I am 52 and am considering an early retirement or part-time work in the future.

Gail Says: The lower interest rates are, the lower the payout from you annuity, regardless of the type you buy. If you believe that interest rates are going to go up, and you do not need the money from the annuity right now to live, then you might want to consider laddering your money in a series of GICs that end when you want to purchase the annuity. So if you have $10,000 you'd buy a 1, 2, 3, 4, and 5-year GIC each for $2,000. When the one year GIC expires, you'd roll it into a 5-year gic, unless you're going to need the money before that, in which case you'd choose the appropriate term. The higher rates go (and the older you are) the better the return you'll earn on that annuity.

 

S Wrote: I'm wondering if we use the jar system, which jar do we use for the kids' activities? (Swimming or dance lessons, etc?) Or are these to be considered fixed expenses?

Gail Says: You should create a separate line on your budget and a separate jar for "kids". It goes under "LIFE" so use one of the existing life budget lines and just change the name on the budget if you're using my interactive budget.

 

L Wrote: My sister has an educational savings account for my 2 nieces but it is in my sister (& husbands) name as well as the children. I know their debt situation and I've been nagging her to deal with it for years and watch your show & check out your website (which I do religiously- you are a hero of mine-smart, bold, tough and beautiful inside and out). My concern is that if it all goes to hell in a hand basket (which I'm terrified it is going to very soon) can any creditor in the event of bankruptcy or garnishing, or anything of that nature, touch the girls' savings account or seize it? I'm getting the terms & agreements of the savings plan so I know cuz I'm making monthly deposits also, and my sister doesn't read or know anything about anything sometimes, she just 'wings' it.

Gail Says: You don't say what kind of educational savings account your sister has set up for your nieces. If it is an RESP, the money actually does not belong to the girls until it is paid out to them. Until then, it belongs to your sister (if she's named as the owner of the plan). As for whether it is attachable if the caca hits the fan, it most certainly is. You should stop making monthly deposits into her plan and open up your own RESP for your nieces so the money remains in your name until they need it.

 

K Wrote: My husband and I have recently called the bank about a consolidation loan for our 4 credit cards (Sears-$5,600 at 29.9% interest OUCH I know that's mine, Capital One $5852.00 at 20.55% (mine), Royal Bank Visa $7,900 at 19.99% (mine), and my husbands Capital One $4,800 at 25.9%). All high interest!!

Since we have a $15,000 line of credit with this bank they are willing to turn the LOC into a loan and add on the Visa and Sears card to be consolidated (we don't have enough equity in our home to qualify for a loan that size to consolidate 4 credit cards and the LOC since we've only owned our home for 2 yrs). The loan would be at 8.9% locked in for 5 years consolidating the Visa, Sears and LOC leaving us with the 2 Capital One cards. I know this would save us a lot of money on interest even if we can only consolidate the 2 cards and LOC.

Do you think we should go for it? I know you say you should try to have your debt paid in 3yrs or less but right now we could not handle the increase in payments that would take. The loan is open and we can pay extra on it at any time (we plan on putting our tax return on this loan).

The monthly payments on the loan would be $589.63 and we know we can afford the payments and still put some aside for emergency and savings. We have filled out your budget sheet and are starting the jars tomorrow (I can't wait!!) This will be the first time we have ever had a savings account or emergency fund which is sad because I'm 45 and my husband is 47. I'm looking forward to the day I can write to you and say we’re debt free!! So what do you think Gail go for the loan and save on some of the interest that's been weighing us down for the past few years??

Gail Says: If you're going to lower your interest costs by using this tactic then I say go for it. You will cut up all but one of those credit cards (don't cancel the accounts, just cut up the cards so you can't use them) until that debt is gone. On the card you keep, you will buy a) set a specific budget amount for and then b) buy your groceries and gas, and then go home and IMMEDIATELY pay off the balance in full. This will keep your credit history nice and shiny. I look forward to getting the "we're debt-free" letter!

 

M Wrote: I have about $95,000 in RRSP and have seen it jump up and down for about twenty years now due to market crises. I also have $240,000 in laddered GICs and they return me a little bit each year if I wish to use it. I am so frustrated with the RRSP situation that I have been considering turning them into GICs. Is this wise? I am a pensioner but only 55.

Gail Says: Okay, first off, you have $95,000 invested in something in an RRSP... you haven't told me what but I'm going to guess mutual funds. If you're uncomfortable with this, feel free to cash out the investments you have and use the money to create a laddered GIC portfolio inside your RRSP.