January 2014 Questions & Answers


Liz wrote:  I am an 18-year-old full-time university student who is working part-time. I am very luckily debt-free because of my parents' generosity and my scholarship success. I have housing, tuition, and food taken care of.  At my present job I am earning $12,000. The problem is that I only have this job for one year, so I must be very wise with saving my earnings! All that I really need to pay for myself is clothing, entertainment, gifts, and travel. It scares me when I see friends just lose track of where their paychecks went.

My question is about the 20%, which I want to save for retirement. I just love the idea of putting some money away now, forgetting about it, and then once I retire finding the sweet surprise of enough money for a nice little holiday! Would an RRSP be the right choice for this money? From what I can gather it protects from taxes, but as I am not in a high tax bracket might something else be wiser and return more?
Gail says: At your tender age and with a long-term view I would most certainly use the RRSP. You don't have to claim the deduction in the year in which you make the contribution. You can put your money in, let it compound on a tax-deferred basis, and claim the deduction in a year when you may have a higher marginal tax rate. This is one of the least understood features of an RRSP. So go ahead and contribute. And then, when you are making more money and paying higher taxes, claim your RRSP contributions from previous years when they do YOU the most good tax-wise. 


Jackie wrote: Recently I spoke to a loan specialist at a major bank regarding a consolidation loan with them. She told me it would be beneficial to close some of my credit card accounts with high balances so I would no longer be charged interest on the amounts owing. What are your thoughts?

Gail says: You cannot close an account if there is an outstanding balance. And nobody suspends interest without some heavy negotiating. What she probably means is that if you get the consolidation loan and pay off those balances, you should then close your highest interest accounts to eliminate the temptation to use them again. 


Cathie wrote: My husband and I currently have no debt besides our mortgage.  We use our credit cards for most purchases but pay off in full each month.  My question is - can you have too much credit available?  We recently opened a new card at our primary bank and want to know if we should keep the old card in case of emergency or close it?  It has no balance owing.  

Gail says: You can have too much credit available but I don't think you do. Besides, you should NOT close an old account after opening a new one because if you do you lose the credit history that goes with that account. If you decide you want to get rid of a card, make sure you are using the newer card regularly to build up its history. Wait at least 6 months (a year is better) and then close the old, unused account.


P wrote: My husband and I just started using the "Money Jars" and budgeting with the help of your website and a debt reduction website. The only problem that I am having with this is that I don't know how to save with for things like school supplies and things like Christmas and birthdays for our kids. I have every penny going everywhere and there is nothing left at the end of the month to add to an extra savings, I can hear you know saying get a second job blah, blah, blah, but I really don't know where to put this on our budget?
Gail says: It's important when you set about making a budget that you create one with the categories that work for you. My budget is a guideline. If you choose to use it, you can always substitute categories... for example, changing "sports" to "Christmas gifts". The next step you must take (and this will work next year since we are pretty close to the holidays now) is to divide the amount you budget for Christmas by 12 and put aside 1/12 each month. So if you plan to spend $1400 on Christmas you would set aside $117 a month. Ditto the money for school supplies or any other annual shopping events. As for what to do this year... you got it girl... find a way to make more money! Or cut your expenses way back. It's a matter of priority. What's more important, (fill in the blank) or having money for Christmas?


J wrote: I am working towards improving my credit. However nine years ago I got myself into financial trouble. I took out a loan $2000 with an interest of approximately 35%.  As well, I had credit card debt of $1500. I stopped making payments on these debts and had my car repossessed. I recently looked at my credit report and these outstanding debts were not on my report. What do you think happened?
Gail says: Not everyone reports to the credit bureau. And sometimes uncollected loans sit for a long time within a company's portfolio before they hand them over to a collection agency. There's no telling why your past indiscretions aren't haunting you, or how long it will last. Are the companies you dealt with still in business? If they aren't that may be why there's no trail. If they are and you follow up, you will likely "reactivate" your file, so you'll have to decide if you:
a) want to make good on the debt, or
b) want to cross your fingers and hang tight to see what happens next. 

This, in large part, will depend on your personality since I would be sweating bullets the whole time I was hanging tight, wondering when this dog was going to suddenly bite me. 


L wrote: Three years ago we sold our house paid off all of our debt except car & mortgage (we reduced the mortgage considerably) and other than those two obligations we are pretty much debt free. We were simply living beyond our means. I have gone back to work to help balance things.  We are thinking of dumping things like life insurance but what happens if the worst happens. We save a little in RRSPs (not enough) and we don't really have a buffer. My husband is looking at a 10% cut in pay to about $60K, and  I clean homes and make $20K per year. We have 3 children. I don't think we live extravagantly. Should a family of five be able to live on what we make and save some too?   We are so proud of what we have done for ourselves so far. We just don't know how to take it to the next level.
Gail says: Life can be expensive. Have you tracked your spending to see where the money is going? Is it going to places you want it to go? If so, and if there is no waste, then it simply may be that you need more money to have the life you want and save some for the future too. You've already adjusted your life once to accommodate your incomes, you may have to do it again. Or you may be willing to find ways to make more money (a part-time job on the weekends, for example). As to whether a family of five should be able to live on your income, there are families who live on less and families who must have more to do all the things they want to do. If you live in a very expensive part of the country, then property costs may eat a substantial amount of your income. If you live rurally, no doubt transportation costs are high. You must figure out what is working or not working for your family and make the adjustments that will work for you. Looking for "general" answers won't help. Do up a budget. Trim back. Look at what you want and what you need. And make some choices.


Mimi wrote: I am on track with my family budget (thanks to you!), however I have a credit card that is at 19.8% and a balance of $3500. I want to have it paid off in 24 months and will be able to put $190.00 per month on it to get rid of it. My question to you is, can I cancel the card while still paying it off or do I need to keep it open until it is completely paid off?  It is so tempting to use and, stupid me, I have the numbers memorized, so even if I don't have it on me, I can use it on the web because it is saved.
Gail says: You can't cancel the card until it is paid off. But you can cut it up, delete your saved number, and remove the temptation. Now we'll see how serious you are about getting to Debt Free Forever. If you keep using the card, you're simply deluding yourself and playing a game. If you're serious, you'll NEVER use that card until a) it is completely paid off and b) you have a system for keeping it paid off. 


F wrote:  My husband received news that he will no longer have a job in six months. He was offered a significant severance package. We’re not sure what to do with that kind of money. We have a mortgage, owe some credit and have two car loans. Our question is do we pay off the debt or max out our RRSP's?  I am 41 and my husband is 45. I have a company pension plan. We have $30,000 in consumer debt plus 2 cars, which have $41000 and $24000 owing and a mortgage of $160000.

Gail says: Not everyone gets to plan ahead like this. You are very fortunate in this regard. The most important thing at this point is to figure out what your most basic expenses will be so that when your husband is “unemployed” you have a plan for living simply. In the best of all worlds, you should practice living on your income for your day-to-day needs, and use his income to eliminate as much of the debt as you can before the two years are up. As for what to do with the severance, you should shelter as much of it as you can in an RRSP. You can always take the money back out if need be. If you’ve worked hard and paid off most of your consumer debt, you’ll be in a position to put whatever doesn’t go into an RRSP into TFSAs, up to a max of $5,000 each. Please use this time to plan carefully. You don’t know how long it will take your husband to get another job, and it is important that you have your financial house in order before his pay comes to an end.