July 2014 Questions & Answers

 


S Wrote:  I've watched your shows for years, and I credit my ability to get through undergrad and grad school with relatively little debt in great part to it (when I'm out shopping I often ask "What would Gail say?" when I'm thinking of buying something.

I've recently got a job that pays an actual live-able wage (about 41 000$/year), and have a 600$/month part time for fun job. In addition to paying my student loans off at an accelerated rate (which I was doing even when working minimum wage) I need to start saving for retirement. I have a few questions:

1) I have an emergency fund of about 9000$ and no other savings. Should I just completely pay off my student line of credit (currently a bit under 9000$ much money at prime+1.5) and then re-build my fund? I initially built it in case I had to move for work, but that is no longer a concern, obviously. Or pay down a chunk of it and keep a bit of a safety net?

2) Saving for retirement terrifies me. Especially the bank retirement calculators that tell me if I save only 10% (about 260$/month after deductions) I'll basically be left living in a cardboard box on the corner. I know I need to start RSP contributions of some sort, and right now I'm eyeing mutual funds at ING or using the Saskatchewan Pension Plan. How do you feel about SSP? Any pros or cons going that way vs mutual funds or other retirements savings strategies?

3) My boyfriend is planning on moving in with me sometime in the next year. He's still in school, and my plan is for us to keep all of our money separate, but split all household costs 50/50. Since we're keeping our money separate what sort of money discussions do you suggest having? Should we maybe just do our own budget spreadsheets and then compare notes about priorities and work from there? He has no debt at all at the moment, but also no credit history, and the only money conversation we've had so far is that he needs to do something to build his credit rating so it doesn't impact us negatively down the road.

 

Gail Says:  You should keep your emergency fund in place, you never know what's going to happen next in life; if you need the kicker to get the LOC paid off, Put $2K towards it, keep making your regular LOC payments and rebuild your 2K in savings; rinse and repeat.

How you choose to save for retirement is completely up to you, as long as you're doing it. Don't let the banks' calculators scare you off, just get started. 10% is a goodly amount to start with. As for which vehicle you choose to use, just make sure you understand what you're getting into before you make the decision on where to go. That doesn't mean delaying the decision indefinitely; it means learning the options.

Have you read up on the SPP? You should. Look at the costs associated (like the management fees) and the returns they've generated. As with any "investment" you should be looking for returns that are reasonably stable. Big swings mean you can win big but lose big. Remember, too, this is a long-term investment so consistency counts. All the same rules apply to choosing a mutual fund. If you went with the SPP it would be because a) you didn't want to have to make any investment decisions and b) you don't ever intend to contribute more than $2,500 a year (that's the max you can do)… if you use an RRSP you're entitled to save up to $7,380 a year (based on your current income) or $4,000 a year if you use the "save 10%" rule, so there's a significant difference.

Your plan for your boy moving in sounds fine to me. You're a smart girl, you've got it worked out.

 

T Wrote:  My husband and I are 3 years away from having no more mortgage. But in the process we have occurred $26000 in debt on our line of credit. I am trying to work with him on a realistic budget from your site. But my job is only 10 months a year. I am an Educational Assistant on contract. We have three teenagers and one with special needs. My question to you is:  should we eliminate our credit cards and live on cash or take my hubby's advice and use both?

 

Gail Says:  You, like many, have joined the rush to mortgage-free only to find yourself accruing debt on other -- usually more expensive -- forms of credit. I strongly recommend you slow down on the mortgage repayment and get that line of credit gone. The line of credit debt is callable, meaning the bank can ask for the money back at any time.

If you've been overspending on your credit cards and then paying them off with the line of credit, the problem is you're not tracking what you're spending. I suggest one of two things:

1. Put the cards on hold (report them lost so new ones are issued, but don't activate them) until the LOC debt is gone, or

2. Start tracking your money The Gail Way using a spending journal, a cash flow budget, and the determination not to put a penny on a credit card that you don't already have the money to pay off. This will keep your credit history healthy while you stop accruing more debt.

You'll also need a debt repayment plan, a solid one with an end date, to get that LOC paid off. To have it gone by the time you're mortgage free, you'll have to come up with $722 on top of whatever interest you're paying every month. It'll be a slog. But so worth it to be debt free. Failing that, you can delay being mortgage free for a few more years and clear up the LOC faster. 

 

H Wrote:  I am ready to start my 5 year old with an allowance. I have read your article which says that a good amount to start with would be about $5 ($1 per year of age) and that 10% should be put away for long term savings. At this age is the remaining $4.50 to all the mad money? And then if they decide to save up for something then at that point we can decide to save the $4.50 or a portion of it until they have enough and how long it will take depending on what portion they put away? Or is there another % for short term that you normally use?

Gail Says:  Yes, you are quite right.  50¢ would go in her sharing container. In our home we also practiced "sharing" and so if you choose to do this 25¢ would go into this container. The rest is divided into mad-money and planned spending. This is where your guidance comes in. Perhaps you can identify something your 5-year old would like and you can encourage her to put something aside each week towards that goal. It's pretty hard at age 5, because you don't want it to take too long to achieve or it your little one will want to give up. All the rest is as you've described it, so you're ready to go.

 

C Wrote:  I have read “It’s Your Money,” which has been helpful to me as I am going through a divorce after being married for 12 years. There is a question I have that I have not been able to find much information on. The only way my ex husband will sign the separation agreement is if he does not have to pay anything toward the joint debt if I keep the house. If I sell the house it will take care of the debt but would leave me with barely enough money to move to an apartment. I would not have enough money for a down payment or any sort. I have 2 kids ages 14 and 11. He sees them 2 days a month. I have them the rest of the time. The house is appraised at $209,000. The joint debt (lines of credit, Visa and overdraft on chequing) total $58,000. The mortgage is at $129,000.

I owned a home before we were married, and had no debt. He had $15,000 in student loans and a car loan. It is on the basis of this that we worked out that he should pay me about $15000 to equalize the assets. The debt accumulated in the years the children were young - he went through a series of layoffs working in the automotive parts industry at a time we moved to this (larger) home. I currently hold a full-time job where I earn $54,000 a year. I have a paid-off car, no other assets.

In the three years we have been separated, his income dropped to $22,000 He pays me about $400 a month in child support. I have been paying all the interest on the debt since date of separation. He has not paid anything towards it.

I have the option of taking him to court to file for uncontested divorce. If I do this the judge would take into consideration my pension which I would have to split with him as he has about $15,000 in RRSPs but no pension. I have 15 years in HOOPP. I would also face higher legal bills. As of now my ex is willing to not touch the pension if I keep the house but take on all the debt.
Am I doing the right thing to assume all this debt in order to keep the house for me and the kids (plus future equity) and to keep my pension?

I find I am barely able to make ends meet and have no savings and I find it very tough to live this way. I would like to keep the kids in the same neighborhood with their friends and in the same school district until at least my youngest child finishes grade 8 - he is now in grade 6. Please help - do you think I am doing the right thing by opting to take all the debt or should I go the route of the court and face a move to a different part of town? If your advice is to say yes - keep the house - then at least I’d have that comfort because it really is difficult to live this way especially at this time of year. I am looking for a higher-paying job and am hopeful things may one day improve for me financially, but in the meantime I have to face the reality of my present situation.

Gail Says:  You don't say where you live and this is significant because there are different rules in each province. Typically, however, you must add up what you own, deduct what you owe and split the difference. In this case, you'd end up with net $22,000 to split between you two, so you'd have to give him half your pension plus $11,000 if you did it through the court system. Keeping the house and the debt actually leaves you $11,000 richer, plus your pension goes untouched. I strongly recommend you sit down with an expert to go through the legalities for your province of residence. If you're in Ontario, contact The Common Sense Divorce and they'll have people on their team to help you through the decision making process.

 

A Wrote:  I am emailing this to you on Boxing Day, one of the biggest days for consumerist spending in North America. I was going to go shopping today but I decided not to after watching your TV show Princess. Thank you for your inspiration!

Have you written any books for a 25-year old who is not in debt but just wants to save more money? I work full-time making about $2300 per month and I live independently. Do you have a budget layout for how much money I should be spending on each aspect of my life?

Gail Says:  A good book for you to start with is Money Rules, and then move on to It's Your Money.

The rule of thumb for how much to be spending is The Life Pie: 35% for shelter, 15% for transportation, 10% to savings, 25% to life and 15% for debt repayment. Since you don't have any debt, you can redistribute that 15% any way you want. Keep in mind these are guidelines and the only hard and fast rules are that you can't go over 100% and you must be saving something.

 

J Wrote:  I am a new graduate of nursing school and have racked up some bad credit card debt since being in school. I owe $18,779.90. My credit cards are 19.99%, 3% and 11.73 % (LOC).
I have completed your budget spreadsheet as well as your debt guide. By paying $638 a month, I will take 3 years to pay off my debt to the creditors (I am making payments, nothing is in collections).

My question is what is a better option?
 
1. Remove money from a TFSA given to me by my parents for the future and pay off debt and use the extra money ($638 per month) towards refueling the TFSA (take 34 months to reach the original amount)
2. Borrow the money from my parents and pay them interest free (take 30 months)
3. Or just pay off the creditors myself and take 36 or so months
4. Is there another option?

Gail Says:  Your other option would be to work harder and earn enough money to get the debt gone sooner. Having had the fun of spending the money now comes the time to pay it off. If you're serious about becoming debt free, adding even $200 more a month to your payment will knock months off your repayment. You should do the calculations for yourself and see how an extra $200, $300 or $400 a month impacts on your debt repayment schedule.

If you have room on your LOC, move your CC debt there to reduce the interest cost on that 19.99% CC.

 

T Wrote:  I am now 61 (Nov 2013). I retired after a car accident, getting almost a full pension. Went through a costly long drawn out separation & divorce. Own my own home (with a mortgage), still helping 2 out of 3 children financially (even though they are older) ex doesn't really help. I have looked at taking CPP early but I can't see the benefits. My pension will be reduced by a % of the amount I should have received at age 65, which is a big chunk. I have about $80,000 in RRSP and @ $15,000 in an investment account that I keep as an emergency buffer because of aging vehicles and in case of major repairs. I have a part time job that adds about $8,000/yr income. Question: What is the benefit of taking the CPP early? Isn't it better to hold off if possible? 

Gail Says:  Most people take CPP early using the "bird in the hand" philosophy. But you already have that bird in your hand because your pension covers it. In fact, you'd lose money since taking CPP early means your benefits are reduced.

If you need more money, kick your kids off your payroll. Baby birds have to learn to fly sometime.

 

C Wrote:  How do you determine how much to charge for rent when compared to your overhead or fixed bills?  When do you raise the rent and how do you determine how much to raise it?

Gail Says:  I take it you're a landlord. In the best of all worlds your rent will cover your fixed expenses plus some extra for ongoing maintenance. But you can only charge what the market will bear, so you've got to look around and see what similar spaces are going for to make sure you're within range. As for when to raise the rent, that'll depend on your jurisdiction and the landlord/tenant rules in place. You'd better figure out those rules if you want to stay on the right side of the law.