March 2014 Questions & Answers

 

 


F Wrote:  In your recent article titled, "Allowances help kids learn how to manage their money” you note three parts for allowances. I am not clear about the second one which is ...The money to be shared...what does that mean? Donations to charity???

Gail Says:  Yes, when I say "sharing" I am referring to what other people call "charity." I'm not fond of the word because of all the connotations, so when dealing with kids I like the idea of using the word "sharing." They can use the money to participate in school fund-raising events like skipping for MS or a food-bank drive. If tithing is a part of your culture as they get older you can use this "sharing" money to introduce the concept of tithing and how the point is to take a little of what you have and share it with someone who has less.

 

S Wrote:  My husband and I are expecting our 2nd baby in 2 months. I will then be off on maternity leave for a year. Our combined income is about 120 K, with potential for more due to overtime. I am a nurse and will receive full income top-up for the first 17 weeks of my leave, then $501/wk through Employment Insurance (which will cover our housing costs only). We currently have a mortgage of 450 K (it's Vancouver) split 50% between fixed/variable rates. We owe 26 K in a student line of credit left over from our wedding, my education and misc life expenses. Our car loan will be completed next month and my older son finishes daycare/preschool this month, so our expenses will reduce by 1 K a month between the two. There will be no childcare expenses for the year I am off work, and only for the new baby after it reaches 18 months of age (we are able to cover childcare before that with a combination of vacation time, shift switches, and family help).

I contribute to a pension through work and my husband has Registered Retirement Savings Plans which his employer matches (currently at about 52K): we withdrew 10K from them for my education (Lifelong Learning Plan) and have been repaying that at 1 K each year (the minimum), we withdrew 25K from them also for our down payment under the Home Buyers Plan and are repaying that at the minimum amounts each year as well (1,666). We use a point’s type credit card for all expenses but pay off the full balance every month (using the line of credit, which my paycheques deposit straight into). I also have a store based card which I use occasionally to build my credit as we realized all our credit was primarily under my husband's name; we never carry a balance on that card either. We put on all extra money from the chequing account (where my husband's paycheques deposit) into the line of credit at the end of each month, sometimes we go down and sometimes we don't (usually when I have worked less due to sickness, or a big expense comes due like car insurance). We have paid it down from 38 K originally.

We are making some big changes budget-wise while I am off on mat leave: trying to reduce cell phone/cable bills, not eating out (which I know has been a budget weakness of ours for many years), not spending money on clothes/house (except emergency/necessities), and cancelling the points credit card (which has an annual fee) and trading it for one without a fee. I know you don't recommend pulling money out of Registered Savings Plans to pay down debt, but I just hate looking at the interest paid on the line of credit. My priority list is to get rid of the line of credit debt, then start Registered Education Savings Plans for our children (which I regret not having already), repay the Retirement Plans from the Lifelong Learning Plan and Home Buyers Plan, then try to increase how much we put on the mortgage and start a Tax Free Savings Account for an emergency fund (rather than using the line of credit as emergency fund as we have in the past).

My question: do you think my priority list is reasonable? Should we just tread water this year while I am off on leave and then tackle the debts once I'm back full-time at work, trying to work overtime to pay down the debt faster? Or should we remove money from our Registered Savings to lower the debt before I go on leave? To you, does our financial situation look manageable, or dire? I have trouble getting a gauge on that, and I lay awake worrying about it sometimes and wonder if we're ok, just a couple with young kids struggling a little but will be ok, or are we really in trouble? Neither of us had much coaching in money management from our parents and we're just figuring it all out now (me at 36 and he at 41).

Sorry this is long but I noticed that many times when answering other people's questions you mention not having enough info: I hope this is enough to give you an idea of our situation. I'd appreciate any help you can give us.

Gail Says:  You're almost there. The only thing that makes me cringe is the withdrawal of money from the RRSP to repay debt. Don't do it. The amount of tax you'll have to pay will be ridokulous because your incomes are high. Since you both have good company pension plans, the rest of your plan is sound. Don't try to do too much at once. Start by setting up the RESPs and the tax-free savings accounts. Don't rush the mortgage repayment until you've settled into the two savings programs (RESP and TFSA) without any bumps. Then look at your budget again and see if you have extra money for speeding up your mortgage repayments. Even a switch to accelerated weekly or bi-weekly payments can make a big diff and cost very little to your cash flow. If you're worried about strapping your cash flow too tight, instead of taking on a bigger monthly payment, (aside from the acceleration), stash the extra money in a high interest savings account and make a once-yearly principal prepayment.

 

J Wrote:  I have a question about the purchase of a new vehicle. Let me give you the "Cole's Notes" backstory here. When I turned 19, I got my first credit card. 1 card turned into 3, that turned into a consolidation loan, followed by more maxed out credit cards, back taxes, student debt etc. All of the sudden, I was 24 years old with $55k in debt. (It's embarrassing to actually write that down for real when I think about how undisciplined and irresponsible I was). Regardless - it's in the past, and now I'm looking forward. I'm living on balanced (albeit tight) budget that includes $1900/mo for debt repayment. Based on my current interest rates etc, I estimate I will be debt free in a week shy of 30 months. I couldn't have done this without your help. Your shows, your website your blog etc have been incredible resource for me, and have given me the tools to help me repair my "sinking ship."

I currently have a car. It's a good car - a Honda with about 118,000 km on it. For work, I am a Territory Manager for a large tech company, so driving is a VERY necessary part of my job. I average about 3500-4000 km per month. Part of my compensation structure includes a $600/mo car allowance as well as an additional mileage reimbursement. As this is a regular part of my income, under the "Car Allowance" program, I do pay taxes on this income; however I am able to claim many vehicle expenses on my annual income taxes, which can provide a decent refund each year.

Here's where the complicated part comes in. I simply can't do what I do without a reliable vehicle. I am very hopeful that my car will likely be "reliable" for at least the next 3 years. However - after those 3 years, my car will have well over 250,000 km on it. My plan is that if I am debt free in 30 months, I can then re-allocate half of the debt-repayment portion of my budget towards saving for a new vehicle. Then at the 3 year mark (from today) I will have $5,700 to put down on a new vehicle. Then comes the age old question: Buy Brand New, or Slightly Used? The argument towards slightly used is of course to help mitigate some of the depreciation. The flip-side of that argument, is that many manufacturer's are currently offering 0% financing on a new vehicle, versus a used vehicle that might be 3-5% (or even higher). When you amortize the interest cost versus the savings of buying 1-2 years old, the price difference becomes less significant. Also - factoring in the amount of driving I do, purchasing a car with 50,000 km on it already can be significant. In addition - there are warranty benefits that can come with a brand new vehicle.

The other reality I have to consider is that because of the Income Taxes I pay on the car allowance, I have the opportunity to deduct some of these expenses against my income taxes. (Do you understand why I feel like I'm spinning in circles yet?) Even it I pay 4% on a used car loan, I can write off a portion of that interest expense against my income tax. If I pay 30% tax on the income I get for the car, the return from the deductions can be significant, which has the added bonus of slightly off-setting the vehicle expenses this way.

I know that this whole thing is likely 3 years down the road, however unplanned spending and an undisciplined lifestyle landed me in a crap-load of trouble recently, and fully realizing that circumstances can change between now and then, I still want to make a plan. Plans can be adjusted when they need to be - but as someone very wise once said "Without a map - the only place you'll ever get is lost."

What should I do?!?!

Gail Says:  You've clearly put a lot of thought into this. You’re right when you say the savings on a second-hand car might be offset by the interest rate on the loan and the added costs associated with maintenance. Like you I drive a lot. And so I made the decision to buy new and keep my car for at least 6 years. You say you get a $600 a month car allowance. If you could find a way to set aside that $600 a month, in three years you'd have a whopping down payment on a car and would need to finance only a small portion.

If that's not an option, you should sit down with your accountant and do the math on the new versus used question; (s)he can help you take into account the tax benefits based on your projected income and your car allowance. The math will give you the answers you're seeking.

 

I Wrote:  I have been with Credit Counseling Society for 3 years and no I have not learnt anything from them. All they do is collect my money and disperse it. I haven't heard anything from them in a year and a half. However, you are a great help. My question is, I would like to pay off my debt sooner but I want to start a retirement plan since I'm getting up there in age. What do you suggest I do? Pay off sooner and take that money and put in retirement or start a retirement now but make it small for now until the debt is paid then still put that money towards retirement?

Gail Says:  I am not a fan of credit counseling for the very reasons you describe. If it were my money, I would get that debt paid off as fast as possible and then take all the money I was putting towards debt repayment and start socking it away for the future.

 

H Wrote:  I watch your show all the time. It has been really helpful. For the past 9 years I ran my own flower shop. I recently sold it for a variety of reasons; one of them was that I set a time line in my mind that if it wasn't bringing in a certain income by the end of 2012 I would let it go. The recession hit the business hard and when it came to the end of the year it was not where I wanted it to be after 9 years of VERY hard work. So, I made a tough decision to sell it. I did just that and started a new, great job this past April. Okay, so here's my question. I feel like I'm starting at the beginning since I know have a regular pay check. It actually feels over whelming! The hardest part for me was creating a budget since I have never had a steady pay check and didn't know exactly how much I was actually bringing home.

When you do a budget and you are behind on certain bills do you put the monthly amount of what you should normally be paying each month, or do you take the whole amount that you owe and put it in? For example; Hydro says we owe them a security deposit since we haven't paid consistently which is an additional $300.  Our last bill (which we've been on equal billing) was only $38 since they took a reading and there had been over payments through the year. Anyway, now we have to pay this deposit (which we will get back as long as we show steady payments for one year) and I'm not sure how to do a budget as it looks like that should go under debt repayment as it won't be a regular monthly bill.

A simple answer I'm sure but it has been confusing and made me step away from the budget since I couldn't figure out how to make it work. Any help would be appreciated since I feel stalled and I've barely begun!

Gail Says:  While the $300 won't be your regular budget amount, it'll be included on your first payment so, technically, you'll be over budget on hydro that month. That means you have to be under-budget on some other category(ies) to the tune of $300 to make up the difference and keep the whole budget balanced. So while your regular budget may include $50 a month for clothes, for the month you are over on hydro, you'll spend (or set aside) nothing for clothes. Wherever you have to cut back on our variable expenses to make the overall budget balance for the month, that's what you do.


 

K Wrote:  My question is in determining net worth. I have a pension fund through work and have been vested in it. My statements however show only the portion I have contributed not the matching amount that the employer is supposed to contribute. So do I count it as $32,000 or so or should it be $64,000? The latter is far more in my favor, as being in my 30's you suggest one year’s salary. Thankfully this isn't my only retirement savings.

Gail Says:  If it's a GUARANTEED match you can count it. If it's up in the air, not so much.

 

D Wrote:  I would like to start by saying I am a big fan and appreciate what you do for people.

My question is dealing with Net income. My wife is a school teacher and her Net income shows $80,659.58 on her tax return; however that does not even come close to her actual monthly income. After I calculate her actual monthly income she actually only nets $51,659.76 a year.  What do I put on the top of my budget sheet actual or what the government says? Am I missing something?

Gail Says:  In all likelihood your wife has deductions for her retirement savings plan at work as well as her benefits. Is it on a 4 over 5 as well? It seems far too much of a drop for it just to be those things. Look at her pay slip. What are all the deductions being taken for? You should be using the amount that goes into the bank as the "net" number. If there are savings at work, you can add those back into the income and then deduct them again in the savings row and it'll be a way.

 

K Wrote:  We are above water but I want to ask your advice about our situation. Presently I am appealing a WSIB decision for my injury and not receiving any LOE Benefits. We are living off of my wife’s income only. I have consolidated all debt onto a BMO credit card decent interest 12.9% and we owe $12,000. Our home is 100% paid for. Should I just continue to make $500 biweekly onto the credit card or would a loan against our home equity be a better route. I have no doubt my lawyer will get my benefits reinstated because we have done this before but it is a long wait. Also, $1000 of my credit card debt is a retainer to my lawyer. I just want all credit gone and live with cash again but it seems scary. I always have that "What if" in the back of my mind.

Gail Says:  Your current CC debt is costing you (12,000 x 12.9% ÷ 12) = $129 a month in interest, which means that $371 of your payment is going to actually pay down the debt. It'll take about 30 months to get it paid off at this rate. As for getting a loan against your house, in all likelihood you're talking about a line of credit. As long as the interest rate on the line is lower than your current interest rate you'll save money. But a) you can't lower your payment amount just because your interest rate goes down and b) you must be very careful not to go further into debt since the bank will lend you heaps of rope with which to hang yourself.

 

A Wrote:  My wife is going back to school this fall, we were thinking or withdrawing all of our RRSP's (approx $6500) via the Life Long Learning Plan instead of getting a student loan, is this a good idea? We are both is our late 20's and I still have a pension through work.

Gail Says:  This is exactly what the LLP is for: to improve your opportunity to earn a higher income. As an alternative to student loans it totally rocks. The LLP loan must be repaid to your RRSP over ten years or the portion not repaid will be included in your income and taxable. Your wife will have to be enrolled on a full time basis to qualify for the LLP. If she isn't already enrolled in a program, she must have received a written offer to enrol before March of the year after you withdraw funds from the RRSPs (and, yes, a conditional written offer is acceptable.)

 

H Wrote:  Everything I know about money I learned from you and in three years my husband and I have gone from 40 k in the red to 40 k in the bank (and that's after paying cash for a new car!)

Because of my husband's job, we're living abroad for a few years. We were given bad information regarding the banking system where we now live and it turns out that our bank cards don't work here like we were told they would. It's largely a cash society so we take cash advances on our credit cards and then run right home to pay them off (so no interest, just ugly fees). My question is: does repeatedly taking cash advances impact our credit score? We never carry a balance and pay off each advance immediately, and it never comes close to 10% of our available limit. We don't really have a choice until we come back to Canada in 2 years, but I'd like to be prepared for the worst if we're doing damage.

Gail Says:  Taking cash advances will not have a negative effect on your credit score so relax. It's almost the same as using it for a purchase except that the interest rate clock clicks on immediately. It's too bad about the accounts/debit card problem and the fees for cash advances. You should limit how often you take the cash advances by planning carefully so you only have to go a couple of times a month.