June 2014 Questions & Answers



L Wrote:  I am 82 years old and belong to the frugal generation. No debts, no money worries. I have often thought that if everyone was like me, our economy would be a disaster because it is so dependent on consumerism. Mark Carney and Jim Flaherty both recommended that Canadians pay down their debt and cut back on their purchases in order to do so. If enough people did that, where would it leave the Canadian economy?  Have you an answer to this dilemma?   

Gail Says:  Do you think spending money we don't have (using credit) to buy stuff we don't need is the way to have a healthy economy? Ultimately, if we can't live within our means, it is only a matter of time before our financial house crumbles. It's not going to be a pretty picture.


E Wrote:  I am 34. I have about 30k in student debt, of which I am able to pay down the interest ($140) and an additional $160 per month ($300 total). I have also taken on extra jobs - and any extra money (jobs, gifts, contracts etc...) goes towards my debt. This equals anywhere from 3 - 6k a year.

At the same time I am putting aside $150 per month into a TFSA which now equals about 2k. This is my only retirement/rainy day money - aside from a small public service pension I am entitled to from working for the gov't for about 6 years. We also own a house in Toronto (400k) so in theory - this house, is also part of a future pension plan.

My new employer has a RRSP matching program, but I'm unsure if I should divert funds contribute to it. Should I postpone putting money into an RRSP until my debt is paid off? Should I pay into the RRSP instead of the TFSA? Or Should I put all of my money into my debt and none into savings?

We also plan on having kids in the next 2-3 years, and I know this extra debt/savings money will have to go towards child care for a few years, as there is no other way to afford it.

My thinking is I should be saving and paying down debt - at the same time - but I would love your advice.

Gail Says:  Okay, if you're putting $160 a month against your student debt, it'll take almost 15 years to get it paid off. If you add an extra $4,500 a year against it, it'll take about 4 years to get it gone. If you suspend or significantly lower your debt repayment, the interest costs will continue to accrue anyway.

As far as the TFSA vs RRSP question goes, if your employer is offering to match your savings, why would you turn your back on that free money? Since you don't expect to have a big pension, using an RRSP makes sense. And any savings you get tax-wise can be used to pay down the student debt, right?

If you're planning to have kids, I suggest that you practise living on your significantly reduced income and sock away the difference to build up your emergency fund and get the debt gone lickety-split.


L Wrote:  I have been a huge fan for years and my husband and I have been using your tools and systems to climb out of our own $75,000 pit. It has been 10 years so far with many stupid decisions along the way, but it looks like in a year and a half we will be paying off the last of our debts *HOORAY!!* My question is: what do you do with the money that was in the debt category of your budget once it is all paid off? We have managed to get through this process without incurring any additional debt so we will have nothing to pay. Do you put it to savings? Redistribute the money across the budget? Start investing?

Gail Says:  Congrats. It must feel great to have had a plan and seen it through. Well done.

Once the debt is gone you should a) boost your savings and b) redistribute some of the money into your budget for the lovely things in life.

If you have been saving only a small amount during your debt-repayment phase, consider doing a 70% to savings 30% to budget split until you've caught up your a) emergency fund and b) retirement savings. Over time, as you close the gap and have enough saved (so when you've established your EF for example) you can put more money into cash flow to finance your lovely life.

If you feel that your savings have been doing well all along, then a 50-50 split is probably fine.

As for investing, that's what you do to make your savings work for you. Everything from a crappy savings account to a high-flying stock is an investment. Some pay less. Some have way more risk. You have to learn about investing so a) you choose investments you understand, b) you buy investments appropriate for your investment time-horizon (if you don't know hat that means, you need to learn, c) you choose investments that fit your risk profile.


K Wrote:  My daughter is taking her first semester of grade twelve with a "travel" academy. She earns her 4 grade twelve credits while studying in Beijing, Thailand, Australia, Fiji and Cambodia. The cost of the program is $20,000 and we have made it quite clear that we aren't paying the whole she-bang for her. She is eligible for a $5,000 scholarship, she has $5,000 in her savings account, she's taken a part time job and works full time in the summer. Question: Can we borrow or use some of her RESP to pay for this????

Gail Says:  Nope, sorry. Your daughter has to be enrolled in a post-secondary program to qualify to use the RESP. It sounds like a FANTASTIC opportunity for her though, with learning far beyond the "schooling" itself. You do know that you can take the principal out of the RESP at any time without tax consequences, right? It's still your money. However, if she earned grant money on that contribution, the government will grab it's grant money back…so proceed with caution.


C Wrote:  I am retired from my fulltime job at WSIB since April. I receive a monthly pension from WSIB.  I recently took a part-time job at my local Walmart.

What I am wondering is: am I setting myself up for a smaller CPP pymt in the future because I will not be making CPP contributions at the maximum level from my part-time earnings? I think he that your CPP amt is based on last or best or something like that 5 years of contributions.

I just (today actually) turned 59 and am planning to apply for CPP at age 60.  I would so appreciate your opinion/advice on what I should be doing re CPP.

Gail Says:  As long as you're earning over $3,500 a year you have to make CPP contributions. The amount you get takes into account the times when had little or no earnings. A certain number of your lowest earnings years can be automatically dropped from the calculation under the "drop-out" provision. For 2014, up to 8 years of your lowest earnings to be dropped from the calculation. This change will benefit all CPP contributors who begin receiving CPP benefits in 2014 or later.

If you stopped working or had a lower income while raising kids, you should claim the "child-rearing provision" to increase your Canada Pension Plan (CPP) benefits. Here's a link to the form you'll have to complete: http://www.servicecanada.gc.ca/cgi-bin/search/eforms/index.cgi?app=prfl&frm=isp1000&ln=eng


C Wrote:  My question is how to get a mortgage after a consumer proposal. Our consumer proposal is all paid off (since March 2012) and we started with a secured credit card 4 years ago which is now no longer considered secured and has a limit of $3200. Our only debt is a student loan of just over $4000. We bring in about $4500 a month after taxes. We are going in circles with banks and just cannot get a mortgage. There has to be a faster way than waiting 6 more years! We pay $1200 a month in rent plus utilities so we know we can afford to own a home in our small northern town. PLEASE HELP I have nowhere else to turn.

Gail Says:  When you decided to do your consumer proposal you were no doubt informed that the record would stay on your credit file for seven years, affecting your ability to borrow. That's just the way it is. Having proven you were incapable of managing your debt, you defaulted. Other creditors who see this know you're a risk and are unwilling to let you use their money if you are not likely to pay it back. One credit card with a $3,200 limit doesn't fix that.

You say you pay $1200 for shelter right now. You seem to think that it'll cost the same to own your own home. Perhaps. But have you done the math? Have you worked out what it will cost for your mortgage, property taxes, home insurance, utilities and maintenance? How much of your net salary does that eat up?

And how much of a downpayment have you saved? If you've got less than 20% it means you're planning to also incur the cost of mortgage insurance. You should be using this time to build your downpayment and practise living as if you were spending what you'll have to spend on your new home. So add up all the costs, subtract your current rent/utilities and put the difference into savings every month. Then you'll be ready when the consumer proposal falls off your record.


S Wrote:  I am a single mom and currently on a disability income from work (about $2,300 per month) and have been for 5 yrs and I don't see that changing. I have about $30,000 in debt myself and have been making the minimum payments so I have a good credit rating but I can’t get it paid down because I don’t have enough income. I am living with my boyfriend and he works full-time, however, he supports his 2 children and his ex-wife and has his own debt. I am thinking of declaring bankruptcy although that goes against everything I believe in. What do you suggest I do? 

Gail Says:  If you are living on a disability income and don't see that changing, and you don't have the money to pay back your debt, wouldn't declaring bankruptcy seem like the obvious next step? You need to see a bankruptcy trustee to determine if you would have any surplus income which would have to be paid out, and how long you would remain in debt. At least find out so you know where you stand. The first appoint would be free. If you go ahead with the bankruptcy, you'll have to be able to come up with about $1,800 to pay the trustee.


S Wrote:  I just finished reading your book, It's Never Too Late. On second read through, while compiling the Cole's Notes version for my husband, I was unsure of one of your rules of thumb. You stated that if a person is in their 50s, they should have saved 8 times their annual salary. Are assets included in that figure or do you mean straight up savings such as RRSPs etc?

Gail Says:  As long as the assets are "saleable" and can be used to produce money to support a body during retirement, they can be counted in the 8x.


A Wrote:  I have seen and heard many of your broadcasts, but not heard anything about how to manage, when drawing pensions.  We thought we would be O.K. when we retired, we have CPP OAS plus company pensions (small ones). Now we are actually retired we find ourselves with little cash flow, we are reducing our expenses as best we can, but some unexpected repair bills have left us scrambling.  Can you do a segment on seniors managing on pensions?

Gail Says:  Sadly a lot of people don't start thinking about living IN retirement until they're actually there, at which point it’s too late to do much else but cut expenses. Life keeps getting more and more expensive. If your income doesn't equal the task, you'll have to find a way to trim back, or go back to work to make some extra money. Even an extra $400 a month…12 hours a week working a PT job, will make a huge difference. 


W Wrote:  How can I pay our closed fixed rate mortgage down quicker? We have a LOC $18,500 owing 3.5% interest, $1400 owing on a credit card interest rate 19.9% mortgage is $800.02 b/w interest is 3.34%. What I've been doing is:  I pay $100.00 b/w to the mortgage on top of our payment=$900.02 b/w, I pay $250.00 b/w to the LOC, and I've been paying $200 b/w to the credit card.  Typically we don't have anything owing on the credit card and I've been concentrating on paying that off. Our limit on the card is $2000.00.  I have an income of $2500-2800 b/w (that's net, not gross).

Gail Says:  Okay, so you owe $1400 on a credit card at 19.9% and you're paying $200 a month. Of that $23 is going to interest, so 1400 ÷ $177 = 7.9… so it'll take you almost 8 months to pay off that CC.

Your $18.500 LOC is costing you $54 a month in interest. So it'll take you 18,500 ÷ 196 = 94 months… almost 8 years to pay it off.

All the while you're putting $100 a month to your mortgage? Why?

You need to make a debt repayment plan focusing a) on getting that CC gone, then b) the line of credit. Then you can focus on the mortgage.

So starting next payment, put the minimum you must to the LOC…take the rest you would have paid on the LOC and the extra $100 you were using for the mortgage and use it to get rid of that credit card at 19.9% as fast as possible. Once the CC payment is gone (freeze that sucker so you can't use it again), you'll have $550 a month for the LOC. It should take you about three years to get that gone, unless you find ways to come up with extra money to get it gone faster. At that point you'll have $550 a month extra in your budget to pay down your mortgage or do whatever you want.