February 2014 Questions & Answers

 


P wrote: We have accumulated debt of over 400,000$ over 10 years of wrong/bad decisions, tax errors and credit card gambling that is now gone as far as I can stomach. We currently have a $340,000 line of credit maxed -  but no mortgage since it has been discharged - as well as many credit cards to add to the crazy mix. Being the gambler, I am seeking and receiving help for the addiction and have stopped wagering but I/we still have this debt to deal with.

Our family of 4 lives in a house worth about $450,000 and we make about $225,000 per year between us before taxes. In order to control this debt bomb, should I just sell the house, pay off the debts and rent a nice home for a few years, accumulate a down payment and get back to the market with little debt and a fresh start. I have about 10 years of working life and my wife has about 15 years left

Gail says: Why would you consider selling the home before putting a mortgage on the home? I understand you've made a mess and that you're serious about cleaning it up, so go and get a mortgage and pay off all the expensive debt. Don't accept a long-term amortization that would see you paying off the mortgage in 25 or 30 years. Go for a 15-year amortization and make higher payments to get to mortgage free faster. Take full advantage of all the prepayment options you can to make extra payments when your cash flow allows. With concerted effort and a commitment to putting things right, you'll be back on track. 

 

Jan wrote: I really want to get serious about saving.  My husband works & makes a fairly good salary. I have tallied all our monthly bills & we are looking to start a cash diet. We are in our early 30s. How much should we be allocating ourselves for play money and how much should we be saving.  
      
Gail says: You need to accumulate an emergency fund equivalent to six months' worth of essential expenses to be safe. And the rule of thumb for savings is "save 10%" of your net. That being said, how much you need to save really depends on how much you have and how much you think you'll need when it comes time to stop working. As for having fun, make sure you build in a little sumthin' sumthin' for that. If you don't have the money to spend to have fun because you are truly strapped for cash, it means getting really creative about ways to have a great time on the cheap. 

 

R wrote:  I am a stay at home mom of 2 little boys. I deal with all the finances, which isn't a problem.  We currently have a Manulife One account which has taken away the official mortgage payment but I don't want to take advantage of this.  Because we don't make a lot of money its hard to make the number go down. So I was hoping you could help me figure out the best amount to pay to make sure the balance goes down and works best for us.  

Gail says: The best way to figure out what you should be paying on your mortgage to get it paid off is to use an online mortgage calculator. Choose an "amortization"  that reflects how many years you want it to take to pay off the mortgage. Remember that the longer the amortization, the lower your payment will be and the more interest you'll pay over the long term. The shorter your amortization, the higher your payment but the faster the mortgage will be gone. Once you’ve decided on your amortization, enter in your mortgage amount (so how much you owe on the Manulife One) and the going interest rate and the calculator will give you back a number. That’s the amount you need to repay on your Manulife One account to get to debt free by the date you’ve set for yourself.

 

T wrote: I am 36 and my husband is 42. We are a couple who do not believe in debt, our mortgage is the only thing we owe, car is paid off, credit paid in full each month, we have life insurance, savings, emergency fund, etc. Our combined income is $110 thousand a year and we have stable jobs. We are having our first baby this spring and are trying to plan ahead for my year off. I have seen on your show where you mention percentages of how much income you should be spending on fixed and variable expenses and I am wondering if these should change based on mat leave pay, if we should still be contributing to saving plans while on mat leave, etc. Any advice for expectant parents trying to budget would be great!
      
Gail says: With your income dropping significantly clearly something will have to go. I often suggest that people practice living on one income and banking the other for baby-stuff and to build up the emergency fund. It also gives you a good idea how you will cope when your income is reduced. As far as the percentages go, they will go out of whack when calculated against one income. But unless you plan to stay home with baby -- in which case you'll have to make some major changes -- this out-of-whack state will not last too long. And as long as you're not using credit to fill the gap in your spending, you should be fine. Suspend your savings until you return to work. And then you'll have to gear them up again not only for your own future, but also for baby's education fund. Keep in mind that with only baby as a distraction, and as a major "motivation", your desire to go shopping will be bigger than ever before. You must keep yourself on a tight leash if you want to come out of this whole. Shop second-hand, set up a clothing exchange with other parents you will meet when baby comes along, and find some free stuff to do. Since yours is a spring baby, you'll be able to head out to the park or go for long walks. Take up a new not-too-expensive hobby. Or learn a new skill. Baby will be plenty, but baby will not be enough, and you want to make sure you're focused on positive things that do you good.

 

Sue wrote:  I am a 29 single woman.  My salary is $57,000.  In terms of my debt, my student loans total $36,000 and my consumer debt is only $2000 (I have two credit cards but no line of credit).   I would like to buy a home in the next twelve months but I don't know if this is a smart or feasible financial objective.  Even with an aggressive savings plan I would only be able to put down 10% on a home (I have no real savings now).  Should I put the home-buying goal aside for now? Should I continue to rent (I pay $600 now) and just focus on paying down my debt.  My concern is that it would take several years to both clear my debt and save for a downpayment.

Gail says: When I tell people they should have a minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money? Well, sweat is one way. Cutting back on what you’re spending is another. Here’s the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years. 

The biggest mistake most people make is not accurately calculating the cost of home ownership to their cash flow:

If you’re buying a $250,000 with 20% down, at 4% amortized over 25 years, your monthly mortgage payment will be $1052.05. What will yours be?

Let’s say the property taxes run at $2400 a year, so that’s $200 a month. How much will you pay in taxes?

And you’ll have to pay house insurance. I pay the equivalent of $100 a month. What will you pay?

Then there are the utilities. I'll estimate at $200 a month. What about where you live?

And maintenance. Don't forget maintenance!

Let's say that based on your estimates, the grand total is $1800 a month… that's what it’ll cost you to actually live in your new home. If you can come up with $1800 a month for your savings (less the $600 you are paying to keep a roof over your head right now), then you’re ready. So if you can come up with $1,200 for your Home Buying Account then you're well on your way. You’ll learn to live on less disposable income...you better start practicing before you buy your home. And you'll build up your downpayment fund. Win/win. Now go do it.

 

A Wrote:  I love your budget spreadsheet but I have a question. Should I include the money my husband and I put into our company pension plan under "Savings"?

Gail Says:  Add the money you put into your company pension plan to your income at the top and then deduct it in the savings row to make the percentages work properly.

 

T Wrote:  I was wondering if you could help guide me in the right direction for life insurance. I left the workforce 2 years ago when I got married to care for my 17 year old step-son who has autism. I have no idea when I will return to the workforce as this would all be dependent on me him getting into residential housing at some point in his adult life.

My husband's salary is $88,000 a year; we have no consumer debt and have a $30,000 emergency fund. However, we do have an $81,000 mortgage (5 year variable rate at prime - 0.9%). My step-son will start paying $500/month for room and board in November once he starts receiving his ODSP which we will apply to our mortgage.

Currently my husband has a 20 year term life policy of $250,000 (expires at age 63) as well as his life insurance policy at work (1 1/2 x his salary) and I have no life insurance. We have been told that we are underinsured and I should be concerned if my husband was to die. Needless to say that has me a little scared but I want to make an educated rational decision. He has a defined benefit pension in which the surviving spouse is entitled to 60% (approx. $3050 monthly before age 65 and $2380 after 65) and I have the same kind of pension but because I left the workforce I will only receive $872.00 monthly plus a $274 supplement until I turn 65. We have stopped contributing to our RRSPs until the mortgage is paid off (approx. 6 years) but they are sitting at $134,000.

I value your advice as it has served us well when we were making the decision to be a one income family. I have talked to our insurance broker and I have been reading articles online but I feel overwhelmed by the different kind of policies and how much I should insure us for. If you can help I would so appreciate it.

Gail Says:  First I am not an insurance specialist. If you want a second opinion please contact Glenn Cooke at http://www.lifeinsurancecanada.com. Here are my thoughts:

1. If you have only an $81,000 mortgage and no other debt, the current insurance should be enough to see the home paid off and a stash of cash in the bank to supplement your income.

2. I'm going to estimate your current net income since you didn't provide it (baby, I can't work with gross, you can't spend your gross income). Based on an online tax calculator your husband is likely banking about $5,500 a month in net income.

3. Assuming your home is paid off; you'd have to cover the living expenses based on what you'd be receiving. Right now you'd get $3050 from his DBP and another $872 + $274 from yours for a total of $4,196. Would that be enough to live on? If so, you don't need more life insurance.

4. You don't say how much longer there is on your husbands 20-yr term policy, but you must weigh the cost of the premiums -- they will be substantial at the age of 63) with your current need for income and your ability to save/get your mortgage paid off, and provide for your son.

5. Please look into a Registered Disability Savings Plan for your son.

 

L Wrote:  I just watched an episode of "Till Debt Do Us Part" during which Gail raised "Pre-marriage questions." I'd love to share those questions with my daughter and her fiancé. Unfortunately, the questions flashed so quickly, I was only able to jot down the first question. Is it possible to get the questions?

Gail Says:  I have a number of blogs on my site for people contemplating marriage like this one:
http://gailvazoxlade.com/blog/archives/3039

And this one:
http://gailvazoxlade.com/blog/archives/3042

And then there's this series:
http://gailvazoxlade.com/blog/archives/23