November 2013 Questions & Answers

 


H Wrote: I would like to set up a budget and need to know how to record medications. Do I put them as an expense when I put the money and then as income when I receive the money back from our insurance company? We also host international students and we receive a stipend for each night they are here. We spend this money on the student. Should we put the stipend in income and the food/gifts/and entertainment we use this money for in each of those categories or just have a separate jar with the stipend money in it and only use it only for those expenses?

Gail Says: You have good instincts so you should do exactly what you've suggested for the medications question and use the Stipend Jar for the students you host.

 

J Wrote: I'm currently reading "Money Rules" and it's fantastic! Thank you! My husband & I have small RRSP investments with different fund companies, through a large wealth management firm. Our financial advisor has suggested moving our accounts from "Client-name" to "Nominee" for an annual fee of $75.00 per person. Mainly, because the firm is a member of the Canadian Investor Protection Fund. Are you a proponent?

Gail Says: When an account is set up in 'client name', it's registered in your name and the dealer (the guys you're dealing with) may only convey instructions on your behalf based on your written instructions or in a non-written form pursuant to a Limited Trading Authorization (LTA). Any monies remitted by the client to the fund company are done so via the dealer. So if you opened an account with ABC Mutual Fund Company in your name and bought $1,000 of The Best Canadian Equity Fund and $1,000 of The Greatest Canadian Dividend Fund, you'd have to give 'em two $1,000 cheques made out to each of the two fund companies.

(Just so you know, an LTA avoids you having to sign every trade instructions; the mutual fund dealer is allowed to execute the trade without submitting signed written instructions to the mutual fund company.)

When an account is set up in 'nominee name', the dealer becomes the registered/legal owner of any mutual funds purchased, which they then hold in trust for you. The dealer that is interacting with the fund company directly so you'd give your money to the dealer, which would then be deposited in the dealer's trust account, and the dealer makes all the trades as the "owner" of the investments. This lets the dealer pool money so only one transfer of funds between the dealer and a given fund company for a given fund per day. Yah, it saves them money (so why they'd charge you for the privilege is beyond me!)

I'm not for or against either one. You have to decide how much you trust your dealer.

 

E Wrote: I am in my 30’s and have recently pulled on my grown-up pants and decided to take my head out of the sand regarding my spending habits and debt after realizing I was steadily digging myself deeper into my overdraft!!

After following your online budget I have climbed my way out of the overdraft, but I have significant consumer debt (about $4,500 on the credit card). I also have student loan debt. I don't make a lot ($28,800 per year), but it's enough if I follow the budget.

My question is: Should I forgo my savings amount on the budget ($100 per month as per your calculation) to put towards the consumer debt until it's paid off? AND should I forgo the emergency amount (also $100) on the budget?

Thanks Gail! I love your no-nonsense and accessible approach! I don't watch the shows, but I do listen to your podcasts and read the blog :)

Gail Says: Congrats on coming to your senses. Don't forgo the emergency savings, but for now focus on getting the credit card paid off lickety-split. Once the debt is gong, redirect all the money you were using for debt repayment to savings/emergency until a) you've caught up the savings and b) you have six months' worth of essential expenses in your emergency fund. Then get back to saving 10% for the long term and incorporate any extra money back into your budget. Have a great life!

 

M Wrote: I am a first time home buyer that will be taking ownership in the late fall. The only debt I carry is ~$11k that is remaining on my car financing deal (0%). I pay diligently pay off my credit card every month and I never miss a car payment. My question is whether it is a better idea to pay off the remainder on my 0% loan prior to taking on the mortgage or if I should put that cash towards a larger down payment.

The comparison of options is simply: smaller monthly mortgage payments vs. more free cash flow through the elimination of debt. I have been leaning towards the elimination of the car loan so that I would have more cash available to take advantage of mortgage acceleration strategies.
Although I have little debt, I do not have substantial savings available and will only be able to afford one of the two options.

Gail Says: Since your car loan isn't costing you a penny in interest, focus on building up that downpayment so you can put more towards your home and take a smaller mortgage.

 

J Wrote: My spouse and I find that using the jar techniques helped us to curb our variable spending which allows us to better allocate savings and any extra money.

Actually, I love your jar system so much; I actually brought some jars & labels for a customer of mine one day! I work with a bank, and am very credit averse, so usually when clients come in for any kind of lending we also have a savings conversation. Sometimes this works out, sometimes not so much.

I have to say, I envy your freedom to call people out for their foolish choices! When working I feel that sometimes I can't get that point across so effectively because I have be provide top notch customer service, though sometimes I feel customers need tough love.

The most difficult thing working at a bank is that I feel there are so many clients that I can't help. It seems as if credit has become an epidemic that generation after generation doesn't understand. It isn't taught in school, or at home or in university, and in a one hour appointment I can't provide all those years of education.

As someone who is a financial professional, do you have any tips for those of us that work in the finance industry and truly care about our customer's personal success can use? There are a handful of customers I've helped with budgeting, but the business places more of an emphasis on automatic transfers than the actual solution (budgeting!), and then the clients simply move the money from savings to chequing anyhow.

Also, other than ABC Life Literacy, which I've volunteered for, are there any other not for profit organizations that teach people about finances? I liked the ABC program, but it was only geared for low to average financial understanding. I'd like to see something maybe also for the average Canadian as well!

Again, I admire what you are able to accomplish, and I know that just watching your shows have brought ideas and inspiration into my finances, so I hope it has done the same for other viewers of all financial levels!

Gail Says: I can only tell you that I believe very strongly we must all be true to what we believe to be happy. I'm glad you're finding ways to help people, and I hear what you're saying about the frustrations of watching folks do things that are financially damaging. I am launching a financial literacy program later this fall and if you want to join "Team Gail" send me another email and I'll add you to the file. I'll be getting in touch with everyone on the "team" once I've finalized the launch date in the fall.

 

S Wrote: Coles Notes: I have a Car Loan at 5.99% over 84 months for a 2011 Dodge Journey SE Plus ($200 bi-weekly payment). If I were to see it through, I would still have to pay off $28,000 approximately...Yes; I tacked on $3000 lien from previous vehicle.

Also, it has 82,000 km's on it and I have had it appraised at a few places recently, getting average quotes on it of $11,500. My question is; would I be better off to trade this vehicle in for something like a cheap truck that has 0% and has a deep enough discount so I can burry the negative equity in it (buy out today would be $23,000)? Or am I stuck with this anchor?

Gail, please push me in the "better" direction.

Gail Says: Am I mistaken, or are you asking me for permission to make the same mistake you made once before? When you say things like "bury the negative equity" I cringe. First, at your delusion -- negative equity is actually debt, so call it what it is -- and then at your unwillingness to face your reality: "bury"? Really?

Where do you suppose you'll get a cheap truck at 0% interest? And when will you come to terms with the fact that when you take on debt for any reason, you can't keep running from it: it has to be repaid. It's not my job to "push you in a better direction." Grow up!

 

D Wrote: I love all your shows and I love that you're not afraid to tell people the hard truth. Thanks for keeping it honest! My question: my husband and I come from families of savers and we are huge savers ourselves. We've paid off our mortgage and we're not even 30 yet, something of which I'm very proud. We've been talking about getting a rental property as an investment but we don't have enough set aside for a downpayment. I have access to a line of credit at PRIME that we could use but on your show, you've given people heck for using credit to finance a downpayment before. Do we 1) just keep right on saving, maybe another year of frugality and we can do it on our own 2) use the line of credit given the amazing interest rate and start building our investment now? My husband leans towards the second option but I'm fairly risk-averse.

Gail Says: You're talking about taking on a fully leveraged investment that has significant on-going costs. Have you added up the total of what it'll cost to carry this investment: your mortgage payment, property taxes, maintenance, the cost of the line of credit (not just the interest, but the cost of paying it off too)? Will you be able to rent the property to cover all your costs? If you cannot, how much will you have to spend from your personal cash flow to support the investments? If the investment property goes unrented for a couple or three months, do you have the personal cash flow to keep everything balanced? Should the property need sudden repairs, do you have enough set aside to do those repairs or will you have to dip into your cash flow for those? How will that impact on your family budget?

 

A Wrote: I have found an extra $50 per month to put towards more retirement savings. I do have a small RRSP that I borrowed against for a home and I am repaying this amount (but have not added any new contributions since starting work with a local government agency 3 years ago). With the government job I have an OMERS pension that is contributed to each pay. I'm trying to decide whether to put the $50 in the RRSP, a TFSA or do the OMERS AVC option. OMERS AVCs operate on a cost recovery basis - the admin fee is $35.00 for 2013. The AVCs haven't been around long - less than 2 years. The rate of return for last year was 9.5%. Most of my gain would be eaten up that $35.00 fee. My heads a-spinin with choices. Talking to others gets me - OMERS is strong, put the money there. Others say - It's too much in one basket use the "safe" bet and add it to your RRSP. Other say a TFSA will save you taxes and you have access when you want your dough. I know it's only 50 bucks a month right now, but long term it can be a lot money.

Gail Says: With a solid pension plan in place, if it were my money, I'd be using the TFSA. When you end up maxing out the TFSA, then the RRSP might be the next step.