October 2013 Questions & Answers

 

 


M Wrote: I have been watching both your shows and decided to implement your budgeting methods in my household so as to have greater control and knowledge over our finances. Though my husband is on board our opinions differ on one point and I would love to hear what you think.

Our debt situation is as follows: We have an $189,000 mortgage at 3.9% which we pay on a weekly/accelerated basis. We put A LOT down on the house which we purchased for $555,000. We have made improvements and additions and since we purchased it the homes in our neighbourhood have appreciated and were we to list now the asking price would probably be about $750,000.

Aside from the home we also pay for a newish car which we purchased at 0% financing and pay $500/month (to be paid off spring 2014).

This is all great aside from the fact that we are strapped for cash, have NO savings or emergency fund and though we've been diligent about always paying off our credit cards in full we do have a $20,000 line of credit at 4% which we've only ever paid the interest on (monthly).

I have been working on a budget and want to start saving/emergency fund and start to pay down the line of credit despite the fact that this will require pretty big sacrifices in other aspects of our life. Though my husband agrees with the savings and emergency fund and a general budget to control our expenditures, he considers us to be in a "good spot" for our age (we are nearing mid 30's) and views our line of credit as an extension of our mortgage. He claims we're tight because we put too much down on the house, that most people don't put so much down and says it's a "tiny" mortgage compared to the value of the home. Since the line of credit is pretty much the same rate as our mortgage he's kind of writing it off and doesn't want to worry about paying it off right now. What do YOU think Gail?

Gail Says: You are in pretty good shape, assuming your home holds its value and keeps rising. And the line is small relative to your overall net worth. If you're strapped for cash, why not roll the line into your mortgage on your next renewal to free up some money. Then STAY THE FRICK OUT OF DEBT. How does that sound?

 

J Wrote: After the economy crash of 08/09, we defaulted on loans, credit cards and utility companies. We managed to keep our mortgage just barely. I currently have 5 items written off as R9's and my question is; should I pay them or leave them? Which will help my score the most? They were written off in 2009. In 2010 I made several payments over a year to bring them down, but stopped in 2011 when my son was born and I had no extra money to make payments.

Gail Says: Nope, don't pay 'em. The damage has been done. Now you want to find ways to rebuild your credit history. I've blogged on the subject. Go read up.

 

R Wrote: A couple of weeks ago on Twitter you posted something about post-claim underwriting with mortgage insurance. After looking it up, I shared the issue with my parents (who have had mortgage insurance with Scotiabank since 2009), and it was pretty scary for them. One question I have that I haven't been able to find an answer for is how often is it done? Are most people screwed over this way? We talked to the financial adviser at the bank and he said that since it had been more than 24 months since they had signed up, they would not have this issue come up. Do you know if that's true?

Gail Says: I don't know why it would be true since the underwriting doesn't happen until the claim is made. If the claim stems from a "pre-existing" condition... some medical condition that existed when the insurance was taken out and lead to death -- the claim would very likely be denied. But by all means get the bank to put it in writing so your parents KNOW they are protected.

 

T Wrote: In your new book, you suggest that it is alright to buy life insurance out on your partner. My husband I just got married in January. He tried to buy life insurance a few months ago and was denied. He is 38 and had some medical issues that put him in hospital and now on daily medicine. Which is why he was denied. We are 50/50 with splitting all expenses and we have a 6 year old girl. He feels he wants to provide for us if something were to happen just like I have a policy in place for if something were to happen to me. What is your suggestion?

Gail Says: I'm sorry hon, if he's been denied, there's not a lot you can do about that. This is exactly why I tell people to buy their life insurance when they are young, healthy and don't need it. The alternative to life insurance is to have a whack of money in the bank.

 

P Wrote: If I have credit cards I'm not using does it make sense to close them? We're planning to buy a house soon and I want to make sure I'm doing the right thing before we apply for a mortgage.

Gail Says: The short answer is YES. When lenders look at how much you can borrow they take into account the credit limits on all the credit you have, whether you're carrying a balance or not and deduct that amount from the amount they're willing to lend you. So reducing your exposure -- your limits -- will potentially give you more mortgage room.

 

T Wrote: My partner and I have been living together for a year. We are both older, and established in our careers. I make twice his income. The house we live in is in his name, and we have legal papers drawn up that state the house is his asset and he is unable to legally touch my teacher's pension should anything happen to our relationship. Our home is older and requires renovation. We have a joint savings account to pay for major renovations and daily maintenance. However, I am growing uncomfortable with having my money go into a joint renovation account since this house will never be my asset. I think I am better off putting my money into savings and investments that are strictly my own, and paying my partner "rent". That way, any equity built into our home is equity that was built with his money. Can you give me your opinion on this? We are both very open to any professional and practical input on this idea.

Gail Says: If you will derive no benefit from the appreciation of the property, I don't know why you'd put money into renovating the property. You are, indeed, correct, that paying "rent" makes more sense. Just make sure that the "rent" you pay is fair. You can continue to build your assets separately.

 

J Wrote: I want to thank you kindly for your advice. I feel that it is very straightforward and manageable. Two years ago I was married and had a baby girl. After her birth, my marriage fell apart and there was a substantial shift in my life. Since that time, I have been working hard at managing my finances on my own. I was always prone to receiving aid from my parents. However, I am slowly adamantly working on paying off my debt and sprucing up my savings. I have a question for you that may seem redundant but I still have confusion with. I have an automatic withdrawal for my savings and I started the emergency fund as well. My budget is very simplistic in that I try and keep my expenses very minimal. There are things that come up however, and I do not know how to account for them. For example, my friend is getting married in June. I recently received the invite. The wedding is in another town. Does something like this come out of my savings? Or should I leave my savings alone and try and accumulate my entertainment fund to pay off the gift and the overnight stay? Basically, when is it appropriate to use savings? Thank you kindly for any advice and thank you once again for your matter of fact nature :)

Gail Says: What you're talking about is "planned spending." I often recommend that people open up a "Curveball account" which is like an emergency fund, but used for smaller things that tend to crop up quickly (so you can't really plan for them), like this trip and present you want to come up with. You'd decide on an amount for the curveball account and work to build up to that amount. It could be anywhere from about $400 to $1200 depending on how often these things crop up and their costs. Then each time you use the curveball money, you'd work to replace it.
Since you like "simple" you could also designate a percent of your "emergency fund" to these "curveball" events. Only you can decide what the amount should be and how much you'll set aside each month to build/replace the $$ used.

 

S Wrote: I am 54. I average about $60, 000 yearly, gross. My current debt is $28, 250 on a HELOC which was mainly for an expensive foundation repair. The rate on the HELOC is 3.5%

I max out my RRSP contributions yearly. My total in my RRSPs is $293, 000, doing OK now in a diversified plan. I only have about $32,000 accumulated in my current pension according to my statement. I have worked different jobs in the past and rolled contributions into my RRSP plan. I only have $8000 in TFSAs. I soon will have an inheritance of $20,000. At my age, should I use that money to pay down the HELOC, or top up my TFSAs?

Gail Says: Your objective should be to move into retirement with no consumer debt and as little mortgage as possible. If it were my money, I'd pay off the debt first. Don't change your repayment amount so the remaining $8,250 gets paid off as fast as possible. Once that's gone, take the payment you were making to the line and contribute that to your TFSA, up to your annual maximum (or to catch up whatever you're able).

 

K Wrote: I am new to your shows but have quickly become addicted. I watch 'Prince$$' in the morning and 'Til Debt do Us Part' in the evening. And love them both. I think I have convinced hubby to start doing things the Gail Way, starting May 1st.

I have one question. If by some miracle there is $$ left over in any of the magic jars, what should be done with that? Roll it over to the next week? Apply to debt repayment or to savings?

Gail Says: It's a good idea to leave some float in jars for the months when the expenses run a little high. This is particularly true for categories like food. If you feel like you have an excess, transfer the extra to your emergency fund to help build that up or slap it against your debt to get it paid off faster. After six months do a reassessment and see if you've allocated too much to some jars and too little to others, reallocating to make the whole thing balance.

 

M Wrote: I would like to buy your app but see that it seems to work with excel only. We have Macs but I would like to use my iPad as it is more portable. It works with a program called Numbers. Is there a way I do this?

Gail Says: Go read this: http://www.macworld.com/article/1168325/editing_excel_files_on_an_ipad.html