November 2014 Questions & Answers

 


S Wrote:  My husband and I run a small business that is a sole proprietorship that is only in his name. All drawings from the business are done in his name and I do not take any form of pay for the work that I do (invoicing, payroll, banking, etc.). I do have signing authority on all accounts and money isn't the issue but I am wondering if it would be in my best interest to take some sort of pay each week. I would then have to pay CPP and WSIB on my earnings and I'm wondering if it would be worth it.

Gail Says:  Your accountant should be advising you on this. This is not a theoretical exercise; you have to crunch the numbers. Splitting the income between you both could reduce your tax rate but would incur costs, as you mention, so you have to do the math.

 

L Wrote:  My fiancé and I are late 20's and make 120k combined. We have no debt as our education was paid for and we were both given cars as gifts. We currently pay $1750/month in rent for a beautiful condo, and with all of our expenses we are able to put away $2000 per month in savings. We are planning to save for a down payment and will have to do it ourselves so we know we will have to save somewhere between 60-80k depending on how much we want to put down (5-20%), and figure this will take about 3-5 years. My question is: how beneficial is it really to enter the real estate market today? Prices are as inflated as ever, and if we want to even consider being able to afford a townhouse one day we will have to move far away from our families, friends, jobs, and the lifestyle we love. On top of that, there are constant maintenance and repairs that need to be done to a house (let alone furnishing it), plus the amount you pay in interest over the years that doesn't even go towards paying down the house. We just feel that we are able to live without compromising our overall lifestyle and are still able to save significant amounts by renting, so I feel that there is no rush to buy. Still, I have that nagging thought that real estate is an "investment", but I know that by buying a house we would be putting more money down the drain that we would never see again, and likely be totally house poor with no room for lifestyle, savings, or travel. I feel like I answered my own question while writing this, however I would love to hear your thoughts on this topic.

Gail Says:  What you're talking about is "opportunity cost." You're trying to balance the potential upside of real estate -- the opportunity for your investment to grow -- with the downside of a correction in the markets (and the subsequent loss of assets). It's a tough call.

First, you should not go into the markets with less than 20% down. If you can't save enough for a healthy downpayment that side-steps CMHC insurance, you're not ready.

Second, if you're buying for the long term, it doesn't matter when you get into the markets (as long as YOU are ready) since over time things will go up and down and up again. But home ownership isn't a short-term decision, so you buy and plan to stay put.

If you are happy living your current lifestyle why screw it up? Sock away your savings. If you decide to buy down the road, you'll have a healthy downpayment. If you decide you like the renter's lifestyle better, you'll have a whack of money to put into investing to grow your assets (as you would if your home were appreciating.) Either way you win.

Take it slowly. Don't do anything you don't want to because of all the blah-blah-blah you hear. Stay sensible.

 

M Wrote:  I was watching a "Til Debt Do Us Part" show today and saw a pie chart come up. It recommended allocating 10% of income to savings and 15% of income to debt repayment. We manage to save $12000 a year and put it into RRSPs. We have no debt other than a car loan of $30,000 at 2% interest and our mortgage of $300,000 split between two interest rates of 2.25% variable and 3.95% fixed. What should we do with our extra cash? Lets say an extra $10000. Pay down the mortgage or put more into savings? Our financial advisor says hands down RRSP due to our tax bracket and the low interest rate of the mortgage. But I would love to see our mortgage go down (we still have 20 years left on it). Here's some extra info. We are in our early 30's and have two sons aged 6 and 7 and aren't planning to have anymore kids. I am a stay at home mom and my husband makes $90,000/year but has no company pension or benefits. We have an RRSP of mutual funds worth around $110,000.

Gail Says:  What are you currently doing, the tax savings you're getting from your RRSP contributions? And what would you do with the tax savings on the additional $10,000 you might save? And are you currently setting aside money of the kids using an RESP to grab the free grant money available?

If you use your tax savings to pay down your mortgage you achieve both ends, right? You save for the future and you eat away at the mortgage. With the time you have until retirement if you stay the course you will be mortgage free before you retire, which is the goal. In the mean time, you can build a healthy nest egg for the future. And since neither you nor your husband will have a pension, you will need those savings.

 

J Wrote:  I have written to you before and you have been very helpful. I changed my life using your books and TV shows and now I have another question. I am about to come into some money from my grandparents, and my family is pressuring me to buy a house. I don't understand the reasoning behind why this is a good idea. In a perfect economy where I could afford both a house and savings, maybe, but I live in Toronto and the market is crazy here. It seems like most people have the house OR the retirement account but not both. My sister-in-law has a house and spends every dime on it; she has no free money to travel (as we do, putting $50 a month into a jar and saving up for it) and no free money to indulge in hobbies or go to restaurants (as we do) and is not putting into an RRSP. But she keeps saying it's all okay because when she retires, she will sell the house, have a big chunk of money and be just grand.

But meanwhile, we are both putting money into our retirement savings. So she will retire after a life of relative poverty, sell her house, have a big chunk of money and then have to pay rent and budget the rest of it. We will retire after a life of relative comfort and predictability as renters, not have a house to sell but get a big chunk of money when we cash in the RRSPs, have to pay rent (as we have been all along, but anyway) and budget the rest of it. I really don't understand how she is coming out ahead.  What am I missing here?

Gail Says:  You're a smart chick. Don't let anyone push you around. The "Home Ownership Dream" has turned into a delusional action for many. If you're happy doing what you're doing, invest your money and have a great life.

 

J Wrote:  This is not a question but a thank you for all the information you provide! I work as a couple’s psychotherapist and money is an issue that I like to address with couples as it is so fundamental. However, not having training in finances I've never been that sure how best to proceed. I was so happy to discover your TV shows and your website. I have been referring people to your show and to the worksheets and articles on your website. What a great learning opportunity for both myself and my clients.

Gail Says:  Thanks hon, it's wonderful to hear that the tools are helping.

 

L Wrote:  OK Gail, I think I did this right. I searched through all the blogs and the site. I've also found very little info online about this. I think this is a new one and I'm desperate for your advice. It's also kind of your fault: Thanks to your advice my wife and I are now in a situation where we can "give back" whenever we see a valid need, this often makes us feel good, though this particular situation has hit hard and close to home.

Last month a colleague I went to grad school with passed away after his battle with cancer took a turn for the worse. Like me he's a young guy, recently married and a new dad. He was still studying when he passed away. His wife is also a grad student at another institution; we've only met a few times.

Most grad students I know don’t carry much (if any) life insurance, and pre-existing conditions are often disqualifying for such plans. Some of us would like to anonymously set up and contribute to a small account for his wife and young son, to draw upon as she sees fit. Would this still be called a trust fund? How does one go about setting one up for a third party and what information/consideration are needed when setting one up? Taxes? I want to do all my homework and make this account easily accessible for both those who want to contribute and for his wife. The last thing I want is to have to pester her repeatedly for information at a very difficult time.

Gail Says:  I'm sorry to hear about the death of your friend and the family he has left behind.  To create a formal trust fund will likely cost more than you want to spend.

I suggest that if all you want to do is help and she's going to use the money as she wishes anyway without restrictions no trust is really necessary. If you are the point guy together you can set up a high-interest savings account in her name to which you make the deposits and she has the control. Or you could set up an account in your name, to which everyone can make their contributions as they wish, and then you could simply mail her a cheque or bank draft once a quarter.  You are a kind man. I'm glad you've found a meaningful way to give back.   

 

A Wrote:  My husband is dead set on owning a house (Condo is not an option for him, it has to be a house), but with maintenance, property tax, and utilities on top of mortgage payments, I just don't think that's realistic in Toronto, with what we make now (Just under 70k net). And moving away from the city really isn't an option, since I don't drive, and buying a cheaper house outside Toronto means we'd be spending $500+ a month extra on a second car, which kinda cancels out any money we'd save by leaving the city.

My husband seems to be obsessed with building equity, and sees not owning a house as a failure. I think that continuing to rent (We currently spend less than 25% of our income on rent) and putting what we're not spending on property tax, utilities, and maintenance in a TFSA is a much better alternative to building equity in a house we can't afford.

So my question is, is it better to buy a house and build equity, or is it better to put what we're not spending on a house into a TFSA and RRSP?

Gail Says:  Putting what we're not spending on a house into a TFSA and RRSP is a great way to build assets. You don't need to own real estate to accumulate a positive and strong net worth. But rather than talking about this theoretically with our mate I suggest you do the actual math and show him how much of your income would be going to home ownership. So ask him to pick a house he thinks you could afford from the MLS listings. Then:

1. Work out what the mortgage payment would be using an online mortgage calculator
2. Using the listing, budget in how much you'll have to set aside a month for property taxes
3. Then there are utilities: heating, hydro, water/sewer tax; figure out a monthly amount
4. Don't forget about home insurance, ask family/friends what they pay for similar home in similar area
5. Add in some money for maintenance; I recommend 3% of the house value (from insurance) but feel free to start with as little as $300 a month for your calculation
6. Add it all up
7. Can you actually afford it? What % of your income is your shelter eating up? Will you have money for the other things you want to do in your life?

 

K Wrote:  My husband and I have been operating a successful HVAC business for 20 years. We are current with the CRA and our wholesalers. We have credit scores of 684 and 750. We recently renewed our mortgage and took out an additional $30 000 so that we could get a secured line of credit for $30 000 for our business. We approached our bank manager and proposed to purchase $30 000 in GICs and use them as secured collateral against the line of credit. We thought this would be a low/non risk investment for the bank because if for some reason we defaulted on the SLOC, they would have the GICs. We were refused on the basis that our credit scores were too low. Is this reason legitimate or is there something else going on? Does being self-employed play a factor?

Gail Says:  You offered to fully collateralize a line of credit and the bank turned you down? This is just another example of the stupid results that come with relying so heavily on credit scores for lending decisions. That being said, if you have $30,000 in cash, why do you need a line of credit? Loan the $30,000 to the company and make the company pay you interest on it. Put the money in the bank (a different bank would make sense to me) and use it as your line, paying the interest you would have paid for the line, but back to the savings account.